FMFP First Community Financial (PK)

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

 

FORM 10-Q

 

 

(Mark One)

x	Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended June 30, 2008

 

¨	Transition report under Section 13 or l5(d) of the Exchange Act

For the transition period from              to             

Commission file number 000-49736

 

 

First Community Financial Corporation

(Exact name of registrant as specified in its charter)

 

 

 

Pennsylvania		23-2321079
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

2 N. Main St., Mifflintown, PA 17059

(Address of Principal Executive Offices)

(717) 436-2144

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act 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.     x   Yes     ¨   No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non- accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer		¨		Accelerated filer		¨
Non-accelerated filer		¨   (Do not check if a smaller reporting company)		Smaller reporting company		x

Indicate by check mark whether the registrant is a shell company (as defined in rule 12b-2 of the Exchange Act.)     ¨   Yes     x   No

Indicate the number of shares outstanding of each class of issuer’s classes of common stock, as of the last practicable date:

 

Class		Outstanding at July 31, 2008
Common Stock, par value $5.00		1,400,486 Shares

 

 

 

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PART I – FINANCIAL INFORMATION

 

Item 1.

Financial Statements

 

FIRST COMMUNITY FINANCIAL CORPORATION

CONSOLIDATED BALANCE SHEETS (Unaudited)

(Dollars In Thousands, Except Share Data)

 

		June 30, 2008			December 31, 2007
ASSETS
Cash & due from banks		$	6,697		$	8,624
Interest bearing deposits with banks			710			501
Federal funds sold			—			957
Cash & cash equivalents			7,407			10,082
Time certificates of deposit			495			594
Securities available for sale			70,624			63,340
Securities held to maturity, fair value 2008 $ 20,239; 2007 $ 21,288			20,798			21,229
Loans—net of allowance for loan losses 2008 $ 1,347; 2007 $ 1,249			203,878			191,225
Premises & equipment, net			6,632			6,770
Restricted investment in bank stocks			2,171			1,965
Investment in life insurance			4,847			4,765
Other assets			3,247			2,325
TOTAL ASSETS		$	320,099		$	302,295
LIABILITIES
Deposits:
Non-interest bearing		$	27,237		$	26,142
Interest bearing			234,508			218,904
Total deposits			261,745			245,046
Short-term borrowings			6,602			10,320
Long-term borrowings			22,000			18,000
Junior subordinated debt			5,155			5,155
Other liabilities			2,487			2,241
TOTAL LIABILITIES			297,989			280,762
SHAREHOLDERS’ EQUITY
Preferred stock, without par value; 10,000,000 shares authorized and unissued			—			—
Common stock, $ 5.00 par value;
Shares authorized – 10,000,000
Shares issued & outstanding -2008-1,400,486; 2007-1,400,000			7,002			7,000
Capital in excess of par value			258			245
Retained earnings			14,563			13,993
Accumulated other comprehensive income			287			295
TOTAL SHAREHOLDERS’ EQUITY			22,110			21,533
TOTAL LIABILITIES & SHAREHOLDERS’ EQUITY		$	320,099		$	302,295

See accompanying notes.

 

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PART I – FINANCIAL INFORMATION, CONTINUED

 

Item 1.

Financial Statements, continued

 

FIRST COMMUNITY FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(Dollars In Thousands, Except Per Share Data)

 

		Three Months Ended June 30,							Six Months Ended June 30,
		2008			2007				2008			2007
INTEREST INCOME
Interest & fees on loans		$	3,404		$	3,119			$	6,792		$	6,184
Interest on taxable securities			871			672				1,695			1,249
Interest on tax-exempt securities			209			192				413			386
Other interest & dividends			50			102				125			223
TOTAL INTEREST INCOME			4,534			4,085				9,025			8,042
INTEREST EXPENSE
Interest on deposits			2,012			1,875				4,079			3,692
Interest on short term borrowings			26			85				94			174
Interest on long term borrowings			335			324				684			648
TOTAL INTEREST EXPENSE			2,373			2,284				4,857			4,514
NET INTEREST INCOME			2,161			1,801				4,168			3,528
Provision for loan losses			75			—				75			—
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES			2,086			1,801				4,093			3,528
NON-INTEREST INCOME
Service charges on deposits			217			192				413			365
Fiduciary activities			100			75				200			175
Earnings on investment in life insurance			52			51				103			103
ATM card fees			141			129				266			237
Realized gain (loss) on sale of foreclosed real estate			—			(1	)			—			21
Other income			70			58				119			107
TOTAL OTHER INCOME			580			504				1,101			1,008
NON-INTEREST EXPENSES
Employee compensation & benefits			920			848				1,905			1,699
Net occupancy & equipment			294			288				578			576
ATM expense			93			88				177			171
Professional fees			76			108				182			186
Director & advisory boards compensation			83			73				174			148
Supplies & postage			70			55				139			123
Other non-interest expenses			346			255				632			514
TOTAL NON-INTEREST EXPENSES			1,882			1,715				3,787			3,417
Income before income taxes			784			590				1,407			1,119
Income tax expense			173			118				292			216
NET INCOME		$	611		$	472			$	1,115		$	903
Basic earnings per share		$	0.44		$	0.34			$	0.80		$	0.65
Dividends per share		$	0.125		$	0.115			$	0.25		$	0.23

See accompanying notes.

 

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PART I – FINANCIAL INFORMATION, CONTINUED

 

Item 1.

Financial Statements, continued

 

FIRST COMMUNITY FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

For the Six Months Ended June 30, 2008 and 2007

(Unaudited)

(Dollars In Thousands, Except Per Share Data)

 

		Common Stock			Capital In Excess of Par Value			Retained Earnings				Accumulated Other Comprehensive Loss				Total
Balance December 31, 2006		$	7,000		$	245		$	12,634			$	(205	)		$	19,674
Comprehensive income:
Net income									903								903
Net change in unrealized gains on securities available for sale, net of taxes of $51													(108	)			(108	)
Total comprehensive income																	795
Cash dividends, $0.23 per share									(322	)							(322	)
Balance June 30, 2007		$	7,000		$	245		$	13,215			$	(313	)		$	20,147
Balance December 31, 2007		$	7,000		$	245		$	13,993			$	295			$	21,533
Cumulative effect adjustment upon change in accounting principle									(195	)							(195	)
Comprehensive income:
Net income									1,115								1,115
Net change in unrealized gains on securities available for sale, net of taxes of $6													(8	)			(8	)
Total comprehensive income																	1,107
Issuance of stock in connection with dividend reinvestment plan			2			13											15
Cash dividends, $0.25 per share									(350	)							(350	)
Balance June 30, 2008		$	7,002		$	258		$	14,563			$	287			$	22,110

See accompanying notes.

 

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PART I – FINANCIAL INFORMATION, CONTINUED

 

Item 1.

Financial Statements, continued

 

FIRST COMMUNITY FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollars In Thousands)

 

		Six Months Ended June 30,
		2008				2007
CASH FLOWS FROM OPERATING ACTIVITIES
Net income		$	1,115			$	903
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses			75				—
Depreciation and amortization			274				282
Net amortization of securities premium			(142	)			(11	)
Net realized gain on sale of foreclosed real estate			—				(21	)
Earnings on life insurance			(103	)			(103	)
Increase in other assets			(895	)			(476	)
Increase (decrease) in other liabilities			51				(18	)
Net cash provided by operating activities			375				556
CASH FLOWS FROM INVESTING ACTIVITIES
Securities held to maturity:
Maturities, calls and principal repayments			2,370				2,531
Purchases			(1,796	)			(2,034	)
Securities available for sale:
Maturities, calls and principal repayments			11,397				6,834
Purchases			(18,696	)			(17,314	)
Proceeds from sales			—				26
Net increase in loans receivable			(12,728	)			(3,834	)
Net (increase) decrease in restricted investment in bank stocks			(206	)			193
Purchases of premises and equipment			(136	)			(61	)
Net maturities of interest bearing time deposits			99				297
Proceeds from sale of foreclosed real estate			—				284
Net cash used in investing activities			(19,696	)			(13,078	)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in non-interest bearing demand and savings deposits			1,095				2,685
Net increase in time deposits			15,604				9,729
Net decrease in short-term borrowings			(3,718	)			(141	)
Proceeds from long-term borrowings			5,000				10,000
Repayment of long-term borrowings			(1,000	)			(14,000	)
Proceeds from dividend reinvestment plan			15				—
Dividends paid			(350	)			(322	)
Net cash provided by financing activities			16,646				7,951
Net decrease in cash and cash equivalents			(2,675	)			(4,571	)
Cash and cash equivalents:
Beginning of year			10,082				12,432
End of period		$	7,407			$	7,861
SUPPLEMENTAL DISCLOSURES:
Cash payments for interest		$	4,896			$	4,556
Cash payments for income taxes		$	303			$	286
NON CASH INVESTING:
Transfer of loans to foreclosed real estate		$	—			$	8

See accompanying notes.

 

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PART I – FINANCIAL INFORMATION, CONTINUED

 

Item 1.

Financial Statements, continued

 

FIRST COMMUNITY FINANCIAL CORPORATION

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

June 30, 2008

Note A – Basis of Presentation

The consolidated financial statements include the accounts of First Community Financial Corporation (the “Corporation”) and its wholly-owned subsidiary, The First National Bank of Mifflintown (the “Bank”). All material inter-company transactions have been eliminated. First Community Financial Corporation was organized on November 13, 1984 and is subject to regulation by the Board of Governors of the Federal Reserve System.

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and are presented in accordance with the instructions to Form 10-Q and Rule 10-01 of the Securities and Exchange Commission Regulation S-X. 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 of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six months ended June 30, 2008, are not necessarily indicative of the results that may be expected for the year ending December 31, 2008.

The consolidated financial statements presented in this report should be read in conjunction with the audited financial statements and the accompanying notes for the year ended December 31, 2007, included in the Corporation’s Form 10-K filed with the Securities and Exchange Commission on March 5, 2008.

Note B – Accounting Policies

The accounting policies of the Corporation as applied in the interim financial statements presented, are substantially the same as those followed on an annual basis as presented in the Corporation’s Form 10-K.

 

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Note C – Comprehensive Income (Loss)

The only comprehensive income item that the Corporation presently has is unrealized gains (losses) on securities available for sale. The components of the change in unrealized gains (losses) are as follows:

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2008				2007				2008				2007
		(Dollars in Thousands)
Unrealized holding losses arising during the period		$	(521	)		$	(293	)		$	(14	)		$	(159	)
Reclassification of losses realized in net income			—				—				—				—
			(521	)			(293	)			(14	)			(159	)
Income tax effect			178				98				6				51
Change in accumulated other comprehensive loss		$	(343	)		$	(195	)		$	(8	)		$	(108	)

Note D – Earnings Per Share

The Corporation has a simple capital structure. Basic earnings per share represents net income divided by the weighted average number of common shares outstanding. The weighted average number of common shares outstanding were 1,400,011 for the six months ended June 30, 2008 and 1,400,021 for the three months ended June 30, 2008 in 2008. For both the three and six months ended June 30, 2007 the weighted average number of shares outstanding were 1,400,000.

Note E – Guarantees

The Corporation does not issue any guarantees that would require liability recognition or disclosure, other than its standby letters of credit. Standby letters of credit written are conditional commitments issued by the Corporation to guarantee the performance of a customer to a third party. Generally, all letters of credit, when issued have expiration dates within one year. The credit risk involved in issuing letters of credit is essentially the same as those that are involved in extending loan facilities to customers. The Corporation, generally, holds collateral and/or personal guarantees supporting these commitments. The Corporation had $176,000 of standby letters of credit as of June 30, 2008. Management believes that the proceeds obtained through a liquidation of collateral and the enforcement of guarantees would be sufficient to cover the potential amount of future payment required under the corresponding guarantees. The current amount of the liability as of June 30, 2008 for guarantees under standby letters of credit issued is not material.

 

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Note F: Fair Value Measurements

In September 2006, the Financial Accounting Standards Board (FASB) issued FASB Statement No. 157, Fair Value Measurements (“SFAS 157”), which defines fair value, establishes a framework for measuring fair value under GAAP, and expands disclosures about fair value measurements. SFAS 157 applies to other accounting pronouncements that require or permit fair value measurements. The new guidance is effective for the Corporation on January 1, 2008, including interim financial statements, with the exception of non-financial assets and non-financial liabilities that are not recognized or disclosed at fair value on a recurring basis. In February 2008, the FASB issued Staff Position 157-2, “Effective Date of FASB Statement No. 157”, that permits a one-year deferral in applying the measurement provisions of SFAS 157 to non-financial assets and non-financial liabilities. The impact of the adoption of the new standard was not material to the Corporation’s results of operations or financial condition.

The primary effect of SFAS 157 on the Corporation was to expand the required disclosures pertaining to the methods used to determine fair values.

SFAS 157 establishes a fair value hierarchy about assumptions used to measure fair values and clarifies assumptions about risk and the effect of a restriction on the sale or use of an asset. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under SFAS 157 are as follows:

Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

Level 2: Quoted prices in markets that are not active, or inputs that are observable either directly or indirectly, for substantially the full term of the asset or liability.

Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e. supported with little or no market activity).

An asset or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.

 

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For financial assets measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy used at June 30, 2008 are as follows (in thousands):

 

Description		June 30, 2008			(Level 1) Quoted Prices in Active Markets for Identical Assets			(Level 2) Significant Other Observable Inputs			(Level 3) Significant Unobservable Inputs
Securities available for sale		$	70,624		$	516		$	69,683		$	425

The Corporation used the following methods and assumptions to estimate fair value:

Securities: The fair value of securities available for sale are determined by obtaining quoted market prices on nationally recognized securities exchanges (Level 1), or matrix pricing (Level 2), which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted prices. For certain securities which are not traded in active markets or are subject to transfer restrictions, valuations are adjusted to reflect illiquidity and/or non-transferability, and such adjustments are generally based on available market evidence (Level 3).

Assets measured at fair value on a non-recurring basis are summarized below:

 

Description		June 30, 2008			(Level 1) Quoted Prices in Active Markets for Identical Assets			(Level 2) Significant Other Observable Inputs			(Level 3) Significant Unobservable Inputs
Impaired loans		$	370		$	—		$	—		$	370

Impaired loans, which are measured for impairment using the fair value of the collateral for collateral-dependent loans, had a carrying amount of $403,000, with a valuation allowance of $33,000, resulting in additional provision for loan losses of $0 for the period.

 

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The table below presents a reconciliation and income statement of gains and losses for available for sale securities measured at fair value on a recurring basis using significant unobservable inputs (level 3):

 

		Three Months Ended June 30, 2008			Six Months Ended June 30, 2008
Fair Value, beginning of period		$	425		$	425
Total gains (losses) included in earnings			0			0
Total gains (losses) included in other comprehensive income			0			0
Purchases, Issuances, and settlements			0			0
Transfers in and/or out of Level 3			0			0
Fair Value, end of period		$	425		$	425

Note G – Shareholders’ Equity

The Corporation has implemented a dividend reinvestment plan during 2008. All holders of twenty-five shares or more are eligible to participate in the plan in which reinvested dividends and voluntary cash contributions of up to $5,000 per quarter may be reinvested in additional common shares at the current fair market value as of the investment date. The Corporation had initially reserved 100,000 shares to be issued in connection with the plan. To date, 486 shares have been issued.

Note H – New and Recently Adopted Accounting Pronouncements

In September 2006, the FASB’s Emerging Issues Task Force (EITF) issued EITF Issue No. 06-4, “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements” (“EITF 06-4”). EITF 06-4 requires the recognition of a liability related to the postretirement benefits covered by an endorsement split-dollar life insurance arrangement. The consensus highlights that the employer (who is also the policyholder) has a liability for the benefit it is providing to its employee. As such, if the policyholder has agreed to maintain the insurance policy in force for the employee’s benefit during his or her retirement, then the liability recognized during the employee’s active service period should be based on the future cost of insurance to be incurred during the employee’s retirement. Alternatively, if the policy holder has agreed to provide the employee with a death benefit, then the liability for the future death benefit should be recognized by following the guidance in SFAS No. 106 or Accounting Principles Board (APB) Opinion No. 12,

 

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as appropriate. For transition, an entity can choose to apply the guidance using either of the following approaches: (a) a change in accounting principle through retrospective application to all periods presented or (b) a change in accounting principle through a cumulative-effect adjustment to the balance in retained earnings at the beginning of the year of adoption. The Corporation adopted EITF 06-04 on January 1, 2008 as a change in accounting principle through a cumulative effect adjustment of retained earnings of $195,000. The expense incurred in the period ended June 30, 2008 is not material to the Corporation’s consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities-Including an amendment of FASB Statement No. 115 (“SFAS 159”). SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value. Unrealized gains and losses on items for which the fair value option has been elected will be recognized in earnings at each subsequent reporting date. SFAS 159 is effective for our Corporation on January 1, 2008. There was no impact on the consolidated financial statements of the Corporation as a result of the adoption of SFAS No. 159 during the first six months of 2008 as the Corporation has not elected the fair value option for any eligible items, as defined in SFAS No. 159.

In March 2008, the FASB issued Statement No. 161, Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133 (SFAS 161 ) . SFAS 161 requires entities that utilize derivative instruments to provide qualitative disclosures about their objectives and strategies for using such instruments, as well as any details of credit-risk-related contingent features contained within derivatives. SFAS 161 also requires entities to disclose additional information about the amounts and location of derivatives located within the financial statements, how the provisions of SFAS 133 have been applied, and the impact that hedges have on an entity’s financial position, financial performance, and cash flows. SFAS 161 is effective for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. The Corporation does not expect the adoption of the new pronouncement will have a material impact on its consolidated financial statements.

In February 2008, the FASB issued a FASB Staff Position (FSP) FAS 140-3, “Accounting for Transfers of Financial Assets and Repurchase Financing Transactions.” This FSP addresses the issue of whether or not these transactions should be viewed as two separate transactions or as one “linked” transaction. The FSP includes a “rebuttable presumption” that presumes linkage of the two transactions unless the presumption can be overcome by meeting certain criteria. The FSP will be effective for the Corporation beginning January 1, 2009 and will apply only to original transfers made after that date; early adoption will not be allowed. The Corporation does not expect the adoption of the new pronouncement will have a material impact on its consolidated financial statements.

 

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In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles . This Statement identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements. This Statement is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles.” The Corporation is currently evaluating the potential impact the new pronouncement will have on its consolidated financial statements.

 

Item 2-

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

Except for historical information, this report may be deemed to contain “forward-looking” statements regarding the Corporation. Examples of forward-looking statements include, but are not limited to, (a) projections or statements regarding future earnings, expenses, net interest income, other income, earnings or loss per share, asset mix and quality, growth prospects, capital structure and other financial terms, (b) statements of plans and objectives of management or the board of directors, and (c) statements of assumptions, such as economic conditions in the Corporation’s market areas. Such forward-looking statements can be identified by the use of forward-looking terminology such as “believes”, “expects”, “may”, “intends”, “will”, “should”, “anticipates”, or the negative of any of the foregoing or other variations thereon or comparable terminology, or by discussion of strategy.

No assurance can be given that the future results covered by forward-looking statements will be achieved. Such statements are subject to risks, uncertainties, and other factors that could cause actual results to differ materially from future results expressed or implied by such forward-looking statements. Important factors that could impact the Corporation’s operating results include, but are not limited to, (i) the effects of changing economic conditions in the Corporation’s market areas and nationally, (ii) credit risks of commercial, real estate, consumer and other lending activities, (iii) significant changes in interest rates, (iv) changes in federal and state banking laws and regulations which could impact the Corporation’s operations, (v) funding costs, and (vi) other external developments which could materially affect the Corporation’s business and operations.

Critical Accounting Policies

The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America, which require the Corporation to make estimates and assumptions (see footnote 1 to the financial statements included in form 10-K for the year ended December 31, 2007). The Corporation believes that of its significant accounting estimates, the allowance for loan losses and valuation of its securities may involve a higher degree of judgement and complexity.

 

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The allowance for loan losses is established through a charge to the provision for loan losses. In determining the balance in the allowance for loan losses, consideration is given to a variety of factors in establishing this estimate. In estimating the allowance for loan losses, management considers current economic conditions, diversification of the loan portfolio, delinquency statistics, results of internal loan reviews, borrowers’ perceived financial and managerial strengths, the adequacy of the underlying collateral, if collateral dependent, or present value of future cash flows and other relevant factors. The use of different estimates or assumptions could produce different provisions for loan losses. Additional information is provided in the discussion below about the provision for loan losses under “Results of Operations”.

Declines in the fair value of securities held to maturity and available for sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses. In estimating other-than-temporary impairment losses, management considers (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Corporation to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. No securities were deemed to be other than temporarily impaired as of June 30, 2008.

Financial Condition

Total assets of the Corporation increased $17,804,000 or 5.9% during the first six months of 2008. Net loans increased $12,653,000 or 6.6% and securities increased by $6,853,000 or 8.1% from December 31, 2007 to June 30, 2008.

Total deposits increased by $16,699,000 or 6.8% from December 31, 2007. Long-term borrowings increased by $4,000,000 or 22.2%, while short-term borrowings decreased $3,718,000 or 36.0% during the same time period. The growth in deposits can be attributed to the Corporation’s continuing business development endeavors as well as depositor’s search for a safe and stable return in light of the instability in the financial markets over the past year.

Results of Operations

Net income for the six months ending June 30, 2008 was $1,115,000 or $0.80 per share compared to $903,000 or $0.65 per share for the same period in 2007. Annualized return on average equity was 10.26% for the first six months of 2008 and 9.12% for the same period in 2007. Annualized return on average assets was 0.72% for the first six months of 2008 and 0.65% for the same period in 2007.

 

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Net income for the quarter ending June 30, 2008 was $611,000 or $0.44 per share compared to $472,000 or $0.34 per share for the same period in 2007. Annualized return on average equity was 11.10% for the second quarter of 2008 and 9.38% for the same period in 2007. Annualized return on average assets was 0.77% for the second quarter of 2008 and 0.67% for the same period in 2007.

Net interest income for the first six months of 2008 increased by $640,000 or 18.1% compared to the same period in 2007. The reasons for the increase in net interest income were an increase in interest earning assets and an increase in net interest margin. For the first six months of 2008, the net interest margin on a fully tax equivalent (FTE) basis was 3.04% compared to 2.91% for the same period in 2007. The FTE basis is calculated by grossing up the yield on tax-exempt securities and loans by the federal tax rate of 34%, in order that the yield on tax-exempt assets may be comparable to interest earned on taxable assets. The primary drivers of the increase in the net interest margin was the decrease in the cost of funds of 0.16% from 3.50% during the first six months of 2007 to 3.34% during the same period in 2008, which was slightly offset by a decrease in the yield on earning assets of 0.03% from 6.41% in 2007 to 6.38% in 2008.

Net interest income for the quarter ended June 30, 2008 increased by $360,000 compared to the same period in 2007. Net interest margin for the quarter ended June 30, 2008 was 3.10% compared to 2.92% during the same period in 2007. The decrease in the yield on earning assets from 6.40% in the first six months of 2007 to 6.31% in 2008 was more than offset by the decrease in the cost of funds from 3.48% during 2007 to 3.21% during 2008.

Provisions for loan losses are charged to income to bring the allowance for loan losses to a level deemed appropriate by management. The Corporation recorded a $75,000 provision for loan losses for the first six months of 2008 compared to no provision in 2007. The increase in the provision in 2008 compared to 2007 is a result of the growth experienced in the loan portfolio, combined with a slight change in qualitative factors in light of the slight downturn in local economic and market conditions. As a percentage of loans, the allowance for loan losses was 0.66% at June 30, 2008, compared to 0.65% at year-end 2007 and 0.67% at June 30, 2007. Impaired loans were $403,000 at June 30, 2008 compared to $1,812,000 at December 31, 2007. Management feels impaired loans are adequately collateralized and loss is not anticipated. Management determines the adequacy of the allowance based on on-going quarterly assessments of the loan portfolio, including such factors as: changes in the nature and volume of the portfolio, effects of concentrations of credit, current and projected economic and business conditions, regulatory and consultant recommendations, repayment patterns on loans, borrower’s financial condition, current charge-offs, trends in volume and severity of past due loans and classified loans, potential problem loans and supporting collateral. Management believes the allowance is presently adequate to cover the inherent risks associated with the Corporation’s loan portfolio.

 

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Non-interest income in the first six months of 2008 increased by $93,000 or 9.2% compared to the same period in 2007. Income from fiduciary activities increased by $25,000, increased activity led to ATM card fees increasing by $29,000, service charges on deposit accounts increased by $48,000, realized gains on sales of foreclosed real estate decreased $21,000, and other non-interest income increased $12,000 during the first six months of 2008 compared to the same period in 2007. The increase in service charges is a result of the increased use of our overdraft protection program.

Non-interest income for the quarter ending June 30, 2008 was $580,000 compared to $504,000 in 2007. This increase is primarily related to the increase in income from fiduciary activities of $25,000, an increase in service charges on deposit accounts of $25,000, and an increase in ATM card fees of $12,000. These increases are the result of greater transaction volumes associated with the change in deposit accounts and trust activity.

Total non-interest expense increased in the first six months of 2008 by $370,000 compared to the first six months of 2007. Employee compensation and benefits increased $206,000 in the first 6 months of 2008 compared to 2007. The increase in salaries and wages are the result of merit increases as well as additional staff positions added to support recent loan and deposit growth. Director and advisory board compensation increased $26,000, supplies and postage increased $16,000, and other operating expenses increased $118,000. The increase in other operating expenses is primarily a result of increases of $19,000 in loan collection costs, $23,000 in training costs, $20,000 in shares tax expense, and $19,000 in FDIC and OCC expenses. As the Corporation continues to add new loan and deposit accounts, as well as new services, additional operating costs will be generated. Over time it is anticipated these costs will be offset by the additional income generated through the expansion of services to our customers and community and new business development.

During the quarter ending June 30, 2008, total non-interest expense increased $167,000 compared to the second quarter of 2007. The primary reason for this increase are the increases in employee compensation and benefits of $72,000, director and advisory board compensation of $10,000, supplies and postage of $15,000, and other operating expenses of $91,000.

Income tax expense was $292,000 for the six month time period ending June 30, 2008 compared to $216,000 for the same time period in 2007. Income tax expense as a percentage of income before income taxes was 20.8% for the period compared to 19.3% for 2007. The reason for the increase in the effective tax rate is tax-exempt income as a percentage of income before taxes was lower in 2008 than 2007. The decrease in the Corporation’s effective tax rate below the statutory rate of 34.0% is a result of tax-exempt income on loans, securities and bank-owned life insurance.

 

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Liquidity

Liquidity represents the Corporation’s ability to efficiently manage cash flows to support customers’ loan demand, withdrawals by depositors, the payment of operating expenses, as well as the ability to take advantage of business and investment opportunities as they arise. One of the Corporation’s sources of liquidity is $261,745,000 in deposits at June 30, 2008, which increased $16,699,000 over total deposits of $245,046,000 at December 31, 2007. Other sources of liquidity at June 30, 2008 are available from the following: (1) investments in interest-bearing deposits with banks and federal funds sold, which totaled $710,000, (2) securities and time certificates of deposit maturing in one year or less, which totaled $801,000, and (3) investments in mortgage-backed securities, which supply income and principal cash flow streams on an ongoing basis. In addition, the Corporation has established federal funds lines of credit with Atlantic Central Bankers Bank and with the Federal Home Loan Bank of Pittsburgh, which can be drawn upon if needed as a source of liquidity. Management is of the opinion that the Corporation’s liquidity is sufficient to meet its anticipated needs.

Capital Resources

Total shareholders’ equity was $22,110,000 as of June 30, 2008, representing a $577,000 increase from December 31, 2007. The growth in capital was a result of net earnings retention of $765,000, a decrease in the accumulated other comprehensive income of $8,000, an increase in common stock and surplus of $15,000 as a result of the initiation of our dividend reinvestment plan, partially offset by a decrease of $195,000 in retained earnings reflecting the cumulative effect adjustment upon adoption of EITF 06-04. The other comprehensive income is due to the change in value of the Corporation’s available for sale securities.

At June 30, 2008, the Bank had a leverage ratio of 8.21%, a Tier I capital to risk-based assets ratio of 14.30% and a total capital to risk-based assets ratio of 15.04%. These ratios indicate the Bank exceeds the federal regulatory minimum requirements for a “well capitalized bank”. The Corporation’s ratios are not materially different than those of the Bank.

 

Item 3.

Quantitative and Qualitative Disclosure about Market Risk

There are no material changes in the Corporation’s interest rate risk exposure since December 31, 2007. Please refer to the Annual Report on Form 10-K of First Community Financial Corporation, filed with the Securities and Exchange Commission on March 5, 2008.

 

Item 4T.

Controls and Procedures

We maintain a system of controls and procedures designed to provide reasonable assurance as to the reliability of the financial statements and other disclosures included in this report, as well as to safeguard assets from

 

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unauthorized use or disposition. The Corporation’s President (Principal Executive Officer) and Chief Financial Officer (Principal Financial Officer) have evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2008. Based upon that evaluation, our President and Chief Financial Officer concluded that our disclosure controls and procedures are effective in timely alerting management to information required to be included in our periodic Securities and Exchange Commission filings. There was no significant change in our internal control over financial reporting that occurred during the quarter ended June 30, 2008, that materially affected, or is reasonably likely to materially affect, the Corporation’s internal control over financial reporting.

PART II – OTHER INFORMATION

 

Item 1.

Legal Proceedings

Not Applicable

 

Item 1A.

Risk Factors

There are no material changes in the Corporation’s risk factors since December 31, 2007. Please refer to the Annual Report on Form 10-K of First Community Financial Corporation, filed with the Securities and Exchange Commission on March 5, 2008.

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

Not Applicable

 

Item 3.

Defaults Upon Senior Securities

Not Applicable

 

Item 4.

Submission of Matters to a Vote of Security Holders

At the annual shareholders’ meeting on April 8, 2008 the following directors were elected to Class B for a term of three years as follows:

 

		FOR		AGAINST		ABSTENTIONS AND BROKER NON-VOTES
Joseph E. Barnes, Sr.		1,134,759		-0-		1,952
Nancy S. Bratton		1,134,759		-0-		1,952
Jody D. Graybill		1,134,759		-0-		1,952
Charles C. Saner		1,134,759		-0-		1,952

The term of office of each of the following other directors continued after the meeting:

Class C Directors – Term expiring 2009

Samuel G. Kint

Roger Shallenberger

 

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Lowell M. Shearer

David L. Swartz

Class A Directors – Term expiring 2010

John P. Henry, III

James R. McLaughlin

Frank L. Wright

 

Item 5.

Other Information

Not Applicable

 

Item 6.

Exhibits

 

Exhibit		Title
3.1		Articles of Incorporation of the Corporation. (Incorporated by reference to Exhibit 2(a) to the Corporation’s December 31, 2001 Registration Statement on Form 10-SB, as filed with the Securities and Exchange Commission on April 17, 2002.)
3.2		Bylaws of the Corporation. (Incorporated by reference to Exhibit 2(b) to the Corporation’s Registration Statement on Form 10-SB, as filed with the Securities and Exchange Commission on April 17, 2002.)
4.1		Certain instruments defining the rights of the holders of long-term debt of the Corporation and certain of its Subsidiaries, none of which authorize a total amount of indebtedness in excess of 10% of the total assets of the Corporation and its Subsidiaries on a consolidated basis, have not been filed as Exhibits in accordance with Item 601(b)(4)(iii) of Regulation S-K. The Corporation hereby agrees to furnish a copy of any of these instruments to the Commission upon request.
31.1		Certification of Principal Executive Officer of First Community Financial Corporation Pursuant to Securities and Exchange Commission Rule 13a-14(a) / 15d-14(a).
31.2		Certification of Principal Financial Officer of First Community Financial Corporation Pursuant to Securities and Exchange Commission Rule 13a-14(a) / 15d-14(a).
32.1		Certification of Principal Executive Officer of First Community Financial Corporation Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2		Certification of Principal Financial Officer of First Community Financial Corporation Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

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SIGNATURES

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

 

						FIRST COMMUNITY FINANCIAL CORPORATION
						(Registrant)
Date: August 12, 2008						BY:		/s/ Jody D. Graybill
								Jody D. Graybill
								President
								(Principal Executive Officer)
Date: August 12, 2008						BY:		/s/ Richard R. Leitzel
								Richard R. Leitzel
								Vice President and Chief Financial Officer
								(Principal Financial Officer)

 

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