<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 September 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
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(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
---------- ----------
1,608,083 common shares, no par value, were outstanding as of October 20, 2000.
<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, 2000 and December 31, 1999
Condensed Consolidated Statements of Income 2
Three and nine months ended September 30, 2000 and 1999
Condensed Consolidated Statements of Comprehensive Income 3
Three and nine months ended September 30, 2000 and 1999
Condensed Consolidated Statements of Cash Flow 4
Nine months ended September 30, 2000 and 1999
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 16
Item 2 Changes in Securities and Use of Proceeds 16
Item 3 Defaults Upon Senior Securities 16
Item 4 Submission to Matters to a vote of Security Holders 16
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
<TABLE>
<CAPTION>
First Community Financial Corporation
Condensed Consolidated Balance Sheets
(dollars in thousands) September 30, 2000
(unaudited) December 31,1999
------------------- ------------------
Assets
<S> <C> <C>
Cash and cash equivalents $ 4,465 $ 6,583
Investment securities - available for sale 17,377 24,623
Mortgaged-backed securities - available for sale 31,665 39,126
FHLB, at cost which approximates market 1,925 1,600
Loans receivable held for sale 338 213
Loans receivable held for investment, net 170,400 150,530
Premisies and equipment 3,991 2,483
Deferred income taxes 2,937 2,792
Other assets 4,840 2,791
------------------- ------------------
Total assets $237,938 $230,741
------------------- ------------------
Liabilities and Shareholders' Equity
Deposits:
Noninterest-bearing demand $ 2,328 $ 2,585
Interest-bearing demand 14,125 14,247
Savings 14,935 15,612
Certificates of deposits, $100,000 and over 23,385 21,918
Other time deposits 102,265 93,178
------------------- ------------------
Total deposits 157,038 147,540
------------------- ------------------
Borrowed money 31,500 32,000
Advance payments by borrowers for property taxes and insurance 53 225
Other liabilities 3,749 3,708
------------------- ------------------
Total liabilities 192,340 183,473
------------------- ------------------
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 September 30, 2000 and
1,880,798 shares issued and outstanding at December 31, 1999 25,827 27,335
Unearned ESOP shares, 137,692 shares at September 30, 2000 and
145,207 shares at December 31, 1999 (2,065) (2,178)
Unearned stock grants, 53,679 shares at September 30, 2000 (926)
Retained earnings, substantially restricted 24,177 23,477
Accumulated other comprehensive income (loss), net (1,415) (1,366)
------------------- ------------------
Total shareholders' equity 45,598 47,268
------------------- ------------------
Total liabilities and shareholders' equity $237,938 $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 September 30, Nine Months Ended September 30,
----------------------------------- ---------------------------------
2000 1999 2000 1999
------------------ --------------- --------------- -----------------
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $ 3,412 $ 2,692 $ 9,852 $ 7,990
Interest and dividends on investments 1,011 1,038 3,152 2,080
---------- ---------- ---------- ----------
Total interest income 4,423 3,730 13,004 10,070
Interest expense:
Interest on deposits 1,990 1,464 5,530 4,536
Interest on borrowed money 539 372 1,567 503
---------- ---------- ---------- ----------
Total interest expense 2,529 1,836 7,097 5,039
---------- ---------- ---------- ----------
Net interest income before provision for loan losses 1,894 1,894 5,907 5,031
Provision for loan losses 105 90 305 270
---------- ---------- ---------- ----------
Net interest income 1,789 1,804 5,602 4,761
---------- ---------- ---------- ----------
Other income:
Total other operating income 146 156 446 515
General and administrative expenses:
Compensation and fringe benefits 957 726 2,816 2,046
Occupancy 84 63 213 189
Furniture and fixtures 87 88 261 260
Advertising 22 41 125 101
Data processing 54 40 148 144
Contributions 1 3 3 1,513
Other 246 215 822 762
---------- ---------- ---------- ----------
Total general and administrative expenses 1,451 1,176 4,388 5,015
---------- ---------- ---------- ----------
Income before income taxes 484 784 1,660 261
Income taxes 156 286 530 142
---------- ---------- ---------- ----------
Net income $ 328 $ 498 $ 1,130 $ 119
---------- ---------- ---------- ----------
PER SHARE DATA, calculated from June 21, 1999, the
date of the Company's initial public offering
Earnings per share, basic $ 0.20 $ 0.29 $ 0.68 $ 0.13
Earnings per shared, diluted $ 0.20 $ 0.29 $ 0.68 $ 0.13
Weighted average shares outstanding, basic 1,611,038 1,731,470 1,669,559 1,731,370
Weighted average shares outstanding, diluted 1,614,661 1,731,470 1,670,766 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 September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net income (loss) $328 $498 $1,130 $119
---------- ---------- ---------- ----------
Unrealized gain (loss) on available for sale securities 5 (202) (93) (966)
Reclassification of net (gains) losses recognized in net income (1) (10) 20 (146)
Income taxes relating to unrealized gain on available (1) 72 25 378
for sale securities ---------- ---------- ---------- ----------
Other comprehensive income (loss) 2 (140) (49) (734)
---------- ---------- ---------- ----------
Comprehensive income (loss) $330 $358 $1,081 ($615)
---------- ---------- ---------- ----------
</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
September 30,
2000 1999
--------------- ----------------
<S> <C> <C>
Cash flows from operating activities:
Net income $1,130 $ 119
Adjustments to reconcile net income (loss) to net cash provided by operating activities
Provision for loan losses 305 270
Depreciation 238 253
ESOP contribution 113
MRP compensation 372
Loss (gain) on sale of securities 20 (146)
(Gain) on sale of assets (54)
Amortization (accretion) of discounts on securities, net (54) (162)
Provision for deferred income taxes (120) (457)
Originations of loans held for sale (690) (5,199)
Proceeds from sale of loans held for sale 566 3,616
Net loss (gains) on sale of loans (1) (19)
Other operating activities (1,521) (859)
------------ -------------
Net cash provided by (used in) operating activities 304 (2,584)
------------ -------------
Investing activities:
Purchases of investment securities available for sale (1,525) (55,507)
Proceeds from sales of securities available for sale 8,110 0
Proceeds from redemptions of securities available for sale 6,560 15,815
Proceeds from principal repayment of mortgage-backed securities available for sale 1,195 2,507
Net increase in loans held for investment (20,175) (14,626)
Additions to other real estate (658)
Proceeds from sale of premises and equipment 68
Purchases of premises and equipment (1,747) (374)
------------ -------------
Net cash used in investing activities (8,172) (52,185)
------------ -------------
Financing activities:
Net increase (decrease) in deposit accounts 9,498 (1,391)
Proceeds from issuance of stock 25,206
Repurchase of common stock (1,520)
Funding of Management Recognition stock grants (1,298)
Payment of dividends on common stock (430)
Repayments of FHLB borrowings, net of proceeds (500) 31,000
------------ -------------
Net cash provided by financing activities 5,750 54,815
------------ -------------
Increase (decrease) in cash and cash equivalents (2,118) 46
Cash and cash equivalents, beginning of year 6,583 6,907
------------ -------------
Cash and cash equivalents, end of period $4,465 $ 6,953
------------ -------------
</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 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
Nine months ended September 30,
-------------------------------
2000 1999
--------------- --------------
(in thousands)
Beginning balance $1,839 $1,331
Provision for loan loss 305 270
Net charge-offs (200) (15)
Balance, end of period $1,944 $1,586
Ratio of net charge-offs to average loans
outstanding 0.12% 0.01%
Ratio of allowance to total loans outstanding 1.11% 1.09%
at end of period
Ratio of allowance to total nonperforming
assets at end of period 116.97% 116.19%
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 and unearned stock grants) 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 nine
month period ended September 30, 2000, the weighted average number of shares
outstanding was 1,669,559. 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. Stock Grant Awards
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 recognize 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 75,232 shares from the public for an
aggregate amount of $1,297,752. The results for the nine months ended
September 30, 2000 included expense of $371,789 related to their award.
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, 2000
Compared to December 31, 1999
Total assets increased 3.1% to $237.9 million at September 30, 2000, compared to
$230.7 million at December 31, 1999. The increase in assets was principally a
result of a $20 million increase in loans, net of reserves, offset by a $2.1
million decrease in cash and cash equivalents and a $14.7 million decrease in
debt securities.
Loans, net of reserves, increased 13.2% at September 30, 2000 to $170.7 million
from the December 31, 1999 balance of $150.7 million. At September 30, 2000,
approximately 61.7% 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 24.3% or $7.9 million,
since December 31, 1999 and the construction loan portfolio increased 23.3% or
$3.6 million since December 31, 1999.
Securities decreased 23% at September 30, 2000 to $49 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
increases. The nine-month
7
<PAGE>
average balance of securities increased 34.5 % for the period ended September
30, 2000 to $55.7 million compared to the $41.5 million average balance on
securities for the nine month period ended September 30, 1999, reflecting the
investment of proceeds received from the initial public offering completed June
21, 1999.
Deposits increased to $157 million at September 30, 2000 from $147.5 million at
December 31, 1999, an increase of 6.4%. 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 September 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 investment strategy. The CMO's reprice
monthly at 78 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 $1.7 million, or 0.70% of
total assets, at September 30, 2000, compared to $1.4 million, or 0.60% of total
assets, at December 31, 1999. Three loans totaling $225 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 $200 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 $779 thousand at September 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
8
<PAGE>
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 $1.8
million and the allowance for impaired loans in the amount of $100 thousand at
September 30, 2000 were adequate to cover probable losses.
Results of Operation for the three month periods ended September 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 $328 thousand was recorded for the three month period ended
September 30, 2000, compared to net income of $498 thousand for the three month
period ended September 30, 1999. The decrease in net income is primarily due to
a 23.4% or $275 thousand increase in other operating expense. The increase in
other operating expense reflects a $72 thousand increase in benefits expense for
the period related to stock grants awarded in June 2000. Salary expense
increased 19.9% or $144 thousand for the period, reflecting management's
commitment to expanding the company's loan and bank operations expertise. Net
interest income after the loan loss provision decreased 1% or $15 thousand.
Other operating income decreased $10 thousand or 6.2% due to a decrease in gains
on securities.
INTEREST INCOME
Interest income increased 18.6% or $694 thousand for the three months ended
September 30, 2000 to $4.4 million compared to $3.7 million for the three months
ended September 30, 1999. The increase in interest income is two fold. Interest
and fees on loans increased 26.7% or $720 thousand reflecting management's
continued emphasis on developing commercial, construction and consumer lending.
Interest income on securities obligations decreased 2.6% or $27 thousand
resulting from a $17.9 million reduction in securities balances outstanding
compared to securities balances outstanding at September 1999.
The average balance on total interest-earning assets increased 7.3% or $15.2
million for the three months ended September 30, 2000 compared to average
balances during the same period in 1999, resulting primarily from a $15.2
million decrease in investment average balances and a $29.5 million increase in
net loan average balances. The average annualized yield on total average
interest-earning assets increased 76 basis points from
9
<PAGE>
the 1999 three month period, reflecting an increase in the annualized yield on
investments and short term securities of 60 basis points and an increase in the
annualized loan yields of 36 basis points.
INTEREST EXPENSE
Interest expense increased 37.7% or $693 thousand to $2.5 million for the three
months ended September 30, 2000 compared to $1.8 million for the three months
ended September 30, 1999. The increase in interest expense was a result of a 36%
increase in interest expense on deposits reflecting the competitiveness of the
local deposit market. A $167 thousand increase in interest expense on FHLB
borrowing reflects the rise experienced in short term interest rates during the
3rd quarter of 2000.
The average balance of interest-bearing liabilities increased 13% or $21.2
million for the three months ended September 30, 2000 compared to average
balances at for the same period in 1999. The average annualized cost on total
average interest-bearing liabilities increased 100 basis points from the 1999
three month period, resulting from an increase in the annualized rate on FHLB
borrowings of 156 basis points and an increase in annualized deposit costs of 88
basis points.
NET INTEREST INCOME
There was virtually no change in net interest income before the provision for
loan losses, for the three-month period ended September 30, 2000, compared to
the three-month period ended September 30, 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> <C> <C> <C>
Three Months
Ended
September 30, '00 7.96% 5.48% 2.48% 3.40%
Three Months
Ended
September 30, '99 7.20% 4.48% 2.72% 3.68%
</TABLE>
PROVISION FOR LOAN LOSSES
A provision of $105 thousand was added to the allowance for loan losses,
increasing the period end balance to $1.9 million or 1.11% of outstanding loans
at September 30, 2000. 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 decreased $10 thousand or 6.1% to $146 thousand for the
three-month period ended September 30, 2000 compared to $156 thousand for the
three-month period ended September 30,1999. The decrease in non-interest income
for the 2000 period is primarily due to non-recurring gains on securities in the
amount of $9 thousand dollars realized in the third quarter of 1999.
NON-INTEREST EXPENSE
Non-interest expense increased 23.4% or $275 thousand to $1.5 million for the
three months ended September 30, 2000 compared to $1.2 million for the three-
month period ended September 30, 1999. The increase in other operating expense
reflects salary expense increases of 19.9% or $144 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 $72 thousand increase in benefit expense was incurred associated with the
Employee stock Ownership Plan (ESOP) and expenses related to the vesting of
stock grants. Data processing expenses increased $14 thousand or 34.9% for the
quarter ended September 30, 2000 compared to the same period for 1999.
INCOME TAXES
The income tax provision for the three month period ended September 30, 2000 was
$156 thousand compared to $286 thousand for the three months ended September
30, 1999, a decrease of $130 thousand from the prior year period. The decrease
in the tax provision is the result of decreases in earnings before income taxes.
The effective tax rates for the respective 2000 and 1999 periods were 32.3% and
36.4%.
Results of Operation for the nine month periods ended September 30, 2000 and
1999
NET INCOME
Net income for the nine months ended September 30 2000 was $1.1 million, an
increase of $1 million. Net income for the nine-month period ended September 30,
1999 was $119 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.
11
<PAGE>
INTEREST INCOME
Interest income increased $2.9 million or 29.1% for the nine months ended
September 30, 2000 to $13 million at September 30, 2000 compared to $10.1
million for the nine months ended September 30, 1999. The increase in interest
income can be principally attributed to a $42.6 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 7.44% to 7.80%.
INTEREST EXPENSE
Interest expense increased 40.9% or $2.1 million for the nine months ended
September 30, 2000 compared to the nine months ended September 30, 1999. The
increase in interest expense was principally a result of a 60 basis point
increase in the annualized cost on interest bearing deposits, and a 116 basis
point increase in the cost of borrowings from the Federal Home Loan Bank. The
aggregate annualized cost of interest bearing liabilities increased 72 basis
points. The average balance outstanding of interest bearing deposits increased
$30.6 million from $151.3 million at September 30, 1999 to $181.9 million at
September 30, 2000, an increase of 20.25%. Average FHLB borrowings increased to
$32.4 million at September 30, 2000 from $12.7 million at September 30, 1999 or
155%.
NET INTEREST INCOME
Net interest income before the provision for loan losses, for the nine month
period ended September 30, 2000, increased 17.4% or $876 thousand compared to
the nine month period ended September 30, 1999. The primary ingredients
affecting the positive growth in net interest income were a 29.1% increase in
interest income and a 40.9% increase in interest expense.
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> <C> <C> <C>
Nine Months
Ended
September 30, 2000 7.80% 5.16% 2.64% 3.48%
Nine Months
Ended
September 30, 1999 7.44% 4.44% 3.12% 3.76%
</TABLE>
12
<PAGE>
PROVISION FOR LOAN LOSSES
A provision of $305 thousand was added to the allowance for loan losses,
increasing the period end balance to $1.9 million or 1.11% of outstanding loans
at September 30, 2000. A provision of $270 thousand was added to the allowance
for loan losses for the period ending September 30, 1999. The increase to the
allowance reflects the significant change in the loan portfolio composition.
NON-INTEREST INCOME
Non-interest income decreased $68 thousand or 13.2% to $446 thousand for the
nine month period ended September 30, 2000 compared to the nine month period
ended September 30, 1999. Non-interest income excluding gains and losses on the
sale of securities and other assets increased 20.2% for the nine months ended
September 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 $146
thousand or 32.7% of the current period non-interest income.
NON-INTEREST EXPENSE
Non-interest expense decreased 12.5% or $626 thousand for the nine months ended
September 30, 2000 compared to the nine month period ended September 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 $295 thousand or 13.9% and $372
thousand of new stock grant expenses referenced earlier, for the nine month
period ended September 30, 2000.
INCOME TAXES
Income tax expense for the nine month period ended September 30, 2000 was $530
thousand compared to a tax provision of $142 thousand for the nine months ended
September 30, 1999, an increase of $389 thousand from the prior year. The
increase in the tax provision was principally a result of a $1.4 million
increase in income before income tax. The average tax rate for the nine months
ended September 30, 2000 and 1999 were 31.9% and 54.3%, respectively.
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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 September 30, 2000, the estimated market value of liquid assets (cash, cash
equivalents, and marketable securities) was approximately $5.4 million,
representing 29.4% 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, 2000, outstanding off-balance sheet commitments
to extend credit in the form of loan originations totaled $16.9 million.
Available lines of credit totaled $16.2 million. Management considers current
liquidity levels adequate to meet the Company's cash flow requirements.
CAPITAL
Shareholders' equity at September 30, 2000 was $45.6 million, a decrease of $1.7
million or 3.5% from $47.3 million at December 31, 1999 and a decrease of $2.1
million or 4.5% from $47.7 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 63.3% of book value at
September 30, 2000. Included in shareholder's equity at September 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 $1.4 million of
accumulated other comprehensive loss related to unrealized losses on securities
available for sale at December 31, 2000. Also included in shareholder's equity
at September 30, 2000 was $2.1 million of unearned common stock for the Employee
Stock Ownership Plan, representing 137,692 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 September 30, 2000, Community
Savings' ratio of Tier I capital to average assets was 13.7%. 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,
2000, Community Savings had a ratio of qualifying total capital to net risk-
weighted assets of 23.6%.
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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 specifications totaled approximately
$428,000.
15
<PAGE>
Recent Events
On October 12, 2000, the company announced that it had received approval to
repurchase up to 178,675 shares, or 10%, of the company's outstanding shares.
The repurchase was completed on October 15, 2000, at an average price of
$19.0625 per share.
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.
On October 17, 2000 a form 8-K was filed announcing approval of
additional stock repurchases.
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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 10/30/2000 /s/ Christopher B. Redcay
----------------- ---------------------------
Christopher B. Redcay
Sr. Vice President, Treasurer and
Chief Financial Officer
<PAGE>
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 11/1/2000 /S/ Christopher B. Redcay
--------------- -------------------------
Christopher B. Redcay
Sr. Vice President, Treasurer and
Chief Financial Officer
18
