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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2004

or

FOR THE TRANSITION PERIOD FROM              to             

Commission file number: 000-49736

FIRST COMMUNITY FINANCIAL CORPORATION

(Exact name of small business issuer as specified in its charter)

(717) 436-2144

(Issuer’s telephone number, including area code)

Indicate by check mark whether the Company (1) has filed all reports required to be filed by Section 13 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  ¨.

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  x.

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: COMMON STOCK, Par Value $5.00 per share 700,000 shares outstanding as of October 31, 2004

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

FIRST COMMUNITY FINANCIAL CORPORATION

CONSOLIDATED BALANCE SHEETS

(Dollars In Thousands, Except Per Share Data)

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)

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 Nine Months Ended September 30, 2003

(Unaudited)

(Dollars In Thousands, Except Per Share Data)

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)

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)

September 30, 2004

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 nine months ended September 30, 2004, are not necessarily indicative of the results that may be expected for the year ending December 31, 2004.

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, 2003, included in the Corporation’s Form 10-KSB filed with the Securities and Exchange Commission on March 15, 2004.

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-KSB.

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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:

During the period ending September 30, 2004, the corporation recognized gains of $6,000 on sales of $382,000 of securities classified as held to maturity. The sales occurred after the corporation had collected a substantial portion of the original principal outstanding.

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 during the period. The weighted average number of common shares outstanding was 700,000 in 2004 and 2003.

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

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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 $167,000 of standby letters of credit as of September 30, 2004. 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 September 30, 2004 for guarantees under standby letters of credit issued is not material.

Note F – New Accounting Standards

In January 2003, the Financial Accounting Standards Board issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51” which was revised in December 2003. This Interpretation provides guidance for the consolidation of variable interest entities (VIEs). First Community Financial Capital Trust I qualifies as a variable interest entity under FIN 46. First Community Financial Capital Trust issued mandatorily redeemable preferred securities (Trust Preferred Securities) to third- party investors and loaned the proceeds to the Corporation. First Community Financial Capital Trust I holds, as it sole asset, subordinated debentures issued by the Corporation.

FIN 46 required the Corporation to deconsolidate First Community Financial Capital Trust I from the consolidated financial statements as of March 31, 2004. There has been no restatement of prior periods. The impact of this deconsolidation was to increase junior subordinated debentures by $5,155,000 and reduce the Trust Capital Securities line item by $5,000,000, which had represented the trust preferred securities of the trust. The Corporation’s equity interest in the trust subsidiary of $155,000, which had previously been eliminated in consolidation, is now reported in “Other assets” as of September 30, 2004. For regulatory reporting purposes, the Federal Reserve Board has indicated that the preferred securities will continue to qualify as Tier 1 Capital subject to previously specified limitations, until further notice. If regulators make a determination that Trust Preferred Securities can no longer be considered in regulatory capital, the securities become callable and the Corporation may redeem them. The adoption of FIN 46 did not have an impact on the Corporation’s results of operations or liquidity.

In March 2004, the Emerging Issues Task Force (EITF) reached consensus on Issue 03-01, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.” EITF No. 03-01 includes new guidance for evaluating and recording impairment losses on debt and equity investments, as well as new disclosure requirements for investments that are deemed to be temporarily impaired. The accounting guidance of EITF No. 03-01 is effective for fiscal years beginning after June 15, 2004, while

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the disclosure requirements are effective for fiscal years ending after June 15, 2004. The Company has not yet determined the impact that adoption will have on its financial position or results of operations as the impact is heavily dependent on the interest rate environment at the date of adoption and pending implementation guidance from the Financial Accounting Standards Board.

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 (iv) other external developments which could materially affect the Corporation’s business and operations.

Critical Accounting Policies

The consolidated financial statements include the Corporation and its wholly-owned subsidiary, The First National Bank of Mifflintown (the Bank). All significant intercompany accounts and transactions have been eliminated.

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The accompanying unaudited consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information, which require the Corporation to make estimates and assumptions. The Corporation believes that of its significant accounting policies, the allowance for loan losses may involve a higher degree of judgement and complexity.

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”.

Financial Condition

Total assets of the Corporation increased $21,902,000 or 9.8% during the first nine months of 2004. Net loans increased $7,011,000 or 5.0% and securities increased by $9,053,000 or 14.5% from December 31, 2003 to September 30, 2004. The increase in loans was primarily in commercial and residential mortgages.

Total deposits increased by $13,178,000 or 7.0% from December 31, 2003 and long-term borrowings increased by $8,000,000 or 100.0% during the same time period. The Corporation’s expansion and business development were responsible for the deposit growth during the first nine months of 2004.

During 2004, 7 commercial properties were taken into foreclosed real estate totaling $1,032,000. As of September 30, 2004, 4 of these properties have been liquidated with remaining foreclosed real estate of $369,000. These remaining 3 properties are secured by real estate and are in the process of liquidation with no loss anticipated by the Bank.

Results of Operations

Net income for the nine months ending September 30, 2004 was $1,458,000 or $2.08 per share compared to $1,616,000 or $2.31 per share for the same period in 2003. The decrease of $158,000 was primarily a result of a $74,000 decline in gains on sales of securities and a $124,000 decline in gains on sales of

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foreclosed real estate. Annualized return on average equity was 11.93% for the first nine months of 2004 and 14.08% for the same period in 2003. Annualized return on average assets was 0.82% for the first nine months of 2004 and 1.04% for the same period in 2003.

Net income for the quarter ending September 30, 2004 was $518,000 or $0.74 per share compared to $492,000 or $0.70 per share for the same period in 2003. The increase of $26,000 was primarily a result of an increase in net interest income. Annualized return on average equity was 12.57% for the third quarter of 2004 and 12.41% for the same period in 2003. Annualized return on average assets for the third quarter was 0.86% compared to 0.91% during the third quarter of 2003.

Net interest income for the first nine months of 2004 increased by $178,000 or 3.6% compared to the same period in 2003. This increase is primarily a result of increased volume of interest earning assets. For the first nine months of 2004, the net interest margin on a fully tax equivalent (FTE) basis was 3.37% compared to 3.69% for the same period in 2003. 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 driver of the decrease in the net interest margin was the decline in the yield on earning assets of 0.60% from 6.39% in 2003 to 5.79% in 2004. This was partially offset by a decrease in the cost of funds of 0.28% from 2.70% to 2.42% during the same time period.

Net interest income for the quarter ended September 30, 2004 increased by $64,000 compared to the same period in 2003. Net interest margin for the quarter ended September 30, 2004 was 3.34% compared to 3.56% during the same period in 2003. The decrease in the cost of funds from 2.56% during 2003 to 2.42% during 2004 was more than offset by the decrease in the yield on earning assets from 6.12% during 2003 to 5.76% during 2004.

The Corporation recorded a $91,000 provision for loan losses for the first nine months of 2004 compared to $90,000 for the first nine months of 2003. As a percentage of loans, the allowance for loan losses was 0.83% at September 30, 2004, compared to 0.85% at year-end 2003 and 0.84% at September 30, 2003. Provisions for loan losses are charged to income to bring the allowance for loan losses to a level deemed appropriate by management. 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,

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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.

Non-interest income in the first nine months of 2004 decreased by $86,000 or 7.2% compared to the same period in 2003. Gains on sales of securities decreased by $74,000 and the gains on sales of foreclosed real estate decreased by $124,000 compared to the first nine months of 2003. These decreases were partially offset by increases of $50,000 from income from fiduciary activities, $19,000 from service charges on deposit accounts, and $14,000 from ATM card fees. The increase in income from fiduciary activities was primarily related to the growth in assets under management from $54,031,000 at December 31, 2003, to $59,892,000 at September 30, 2004.

Non-interest income for the quarter ending September 30, 2004 was $398,000 compared to $335,000 in 2003. This increase is primarily related to the increase in income from fiduciary activities which was related to the increase in assets under management.

Total non-interest expense increased in the first nine months of 2004 by $343,000 compared to the first nine months of 2003. Employee compensation and benefits increased by $249,000 or 12.5% compared to the same period in 2003. Several factors contributed to this increase including payroll increases as a result of normal merit increases, additions to staff, and increases in the cost of medical insurance. Additional increases in employee compensation and benefits are anticipated as the Corporation continues to grow in size and number of locations. Also, professional fees increased by $59,000 due to continued audit and legal expenses related to regulatory compliance as well as additional legal expenses related to efforts to collect two commercial loans and related litigation. ATM expense increased $25,000 during the same time period as a result of increased ATM usage and an increase in ATM interchange fees. As the Corporation continues to add new offices and 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 September 30, 2004, total non-interest expense increased $96,000 compared to the third quarter of 2003. Employee compensation and benefits increased by $101,000 and was the principal reason for the increase in total non-interest expense.

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Income tax expense was $426,000 for the nine month time period ending September 30, 2004 compared to $520,000 for the same time period in 2003. Income tax expense as a percentage of income before income taxes was 22.6% for the period compared to 24.3% for 2003. 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.

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 $200,441,000 in deposits at September 30, 2004, which increased $13,178,000 over total deposits of $187,263,000 at December 31, 2003. Other sources of liquidity at September 30, 2004 are available from the following: (1) investments in interest-bearing deposits with banks and federal funds sold, which totaled $1,194,000, (2) securities maturing in one year or less, which totaled $3,214,000, 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 $16,975,000 as of September 30, 2004, representing a $1,048,000 increase from December 31, 2003. The growth in capital was a result of net earnings retention of $1,094,000 partially offset by a decrease in accumulated other comprehensive income of $46,000. The accumulated other comprehensive loss is due to the change in value of the Corporation’s available for sale securities.

At September 30, 2004, the Corporation had a leverage ratio of 8.43%, a Tier I capital to risk-based assets ratio of 16.86% and a total capital to risk-based assets ratio of 18.08%. The Bank’s ratios exceed the federal regulatory minimum requirements for a “well capitalized bank”. At September 30, 2004, the Bank’s ratios are not materially different than those of the Corporation. As disclosed in Note F to the Financial Statements, these ratios will be adversely affected if the Federal Reserve Board changes its current position on the treatment of trust preferred securities as Tier 1 Capital.

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Item 3. Quantitative and Qualitative Disclosure about Market

There are no material changes in the Corporation’s interest rate risk exposure since December 31, 2003. Please refer to the Annual Report on Form 10-KSB of First Community Financial Corporation, filed with the Securities and Exchange Commission on March 15, 2004.

Item 4. 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 unauthorized use or disposition. The Corporation’s Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2004. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective in timely alerting them 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 September 30, 2004, 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 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

Not Applicable

Item 5. Other Information

Not Applicable

Item 6. Exhibits

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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.

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