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 September 30, 2011

 

¨	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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    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 of issuer’s classes of common stock, as of the latest practicable date:

 

Class		Outstanding at October 31, 2011
Common Stock, par value $5.00		1,406,548 Shares

 

 

 

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PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

 

FIRST COMMUNITY FINANCIAL CORPORATION

CONSOLIDATED BALANCE SHEETS

(Dollars In Thousands, Except Share Data)

 

		September 30, 2011				December 31, 2010
		(unaudited)				(audited)
ASSETS
Cash & due from banks		$	8,142			$	10,280
Interest bearing deposits with banks			561				264
Federal funds sold			2,934				10
Cash & cash equivalents			11,637				10,554
Time certificates of deposit			198				198
Securities available for sale			74,101				75,627
Securities held to maturity, fair value 2011 $ 34,798; 2010 $ 30,976			33,354				31,872
Loans			245,181				238,596
Less: Allowance for loan losses			(2,561	)			(2,154	)
Less: Deferred loan fees and costs, net			(218	)			(211	)
Net loans			242,402				236,231
Premises and equipment, net			6,539				5,802
Restricted investment in bank stocks			2,219				2,541
Investment in life insurance			7,331				7,109
Other assets			4,588				4,221
TOTAL ASSETS		$	382,369			$	374,155
LIABILITIES
Deposits:
Non-interest bearing		$	33,817			$	31,910
Interest bearing			291,823				285,939
Total deposits			325,640				317,849
Short-term borrowings			2,850				4,030
Long-term borrowings			15,000				16,000
Junior subordinated debt			5,155				5,155
Other liabilities			2,840				2,839
TOTAL LIABILITIES			351,485				345,873
SHAREHOLDERS’ EQUITY
Preferred stock, without par value; 10,000,000 shares authorized and unissued			—				—
Common stock, $ 5.00 par value; 10,000,000 shares authorized Shares issued; 2011 – 1,410,199; 2010 – 1,407,412 Shares outstanding; 2011 – 1,406,548; 2010 – 1,403,761			7,051				7,037
Capital in excess of par value			485				415
Retained earnings			21,952				19,560
Treasury stock, at cost 2011 – 3,651 shares; 2010 – 3,651 shares			(110	)			(110	)
Accumulated other comprehensive income			1,506				1,380
TOTAL SHAREHOLDERS’ EQUITY			30,884				28,282
TOTAL LIABILITIES & SHAREHOLDERS’ EQUITY		$	382,369			$	374,155

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								Nine Months Ended
		September 30,								September 30,
		2011				2010				2011				2010
INTEREST INCOME
Interest & fees on loans		$	3,718			$	3,629			$	10,992			$	10,647
Interest on taxable securities			573				629				1,687				1,909
Interest on tax-exempt securities			353				314				1,032				955
Other interest & dividends			7				11				23				32
TOTAL INTEREST INCOME			4,651				4,583				13,734				13,543
INTEREST EXPENSE
Interest on deposits			1,186				1,376				3,807				4,463
Interest on short term borrowings			10				12				29				39
Interest on long term borrowings			197				217				595				740
TOTAL INTEREST EXPENSE			1,393				1,605				4,431				5,242
NET INTEREST INCOME			3,258				2,978				9,303				8,301
Provision for loan losses			303				89				454				203
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES			2,955				2,889				8,849				8,098
NON-INTEREST INCOME
Service charges on deposits			202				171				570				567
Fiduciary activities			114				102				428				372
Earnings on investment in life insurance			88				58				260				169
ATM card fees			176				165				514				474
Realized gains on sales of securities			—				—				12				182
Realized gains on sale of foreclosed real estate			—				67				6				67
Other income			195				112				475				250
TOTAL OTHER INCOME			775				675				2,265				2,081
NON-INTEREST EXPENSES
Employee compensation & benefits			1,270				1,170				3,738				3,397
Net occupancy & equipment			267				272				815				851
ATM expense			89				92				256				283
Professional fees			113				101				377				331
Director & advisory boards compensation			85				84				241				278
Supplies & postage			74				80				245				238
FDIC and OCC assessments			73				134				279				410
Other non-interest expenses			379				324				1,130				1,018
TOTAL NON-INTEREST EXPENSES			2,350				2,257				7,081				6,806
Income before income taxes			1,380				1,307				4,033				3,373
Income tax expense			290				307				861				741
NET INCOME		$	1,090			$	1,000			$	3,172			$	2,632
Basic earnings per share		$	0.78			$	0.71			$	2.26			$	1.88
Dividends per share		$	0.190			$	0.170			$	0.555			$	0.500

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, 2011 and 2010

(Unaudited)

(Dollars In Thousands, Except Per Share Data)

 

		Common Stock				Capital In Excess of Par Value				Retained Earnings				Treasury Stock				Accumulated Other Comprehensive Income				Total
Balance – January 1, 2010		$	7,022			$	350			$	16,820			$	(110	)		$	1,276			$	25,358
Comprehensive income:
Net income											2,632												2,632
Change in net unrealized losses on securities available for sale, net of deferred income taxes																			294				294
Total comprehensive income																							2,926
Issuance of stock in connection with Dividend reinvestment plan – 2,282 shares			11				48																59
Cash dividends, $0.50 per share											(700	)											(700	)
Balance, September 30, 2010		$	7,033			$	398			$	18,752			$	(110	)		$	1,570			$	27,643
Balance – January 1, 2011		$	7,037			$	415			$	19,560			$	(110	)		$	1,380			$	28,282
Comprehensive income:
Net income											3,172												3,172
Change in net unrealized gains on securities available for sale, net of deferred income taxes and reclassifications																			126				126
Total comprehensive income																							3,298
Issuance of stock in connection with dividend reinvestment plan – 2,787 shares			14				70																84
Cash dividends, $0.555 per share											(780	)											(780	)
Balance, September 30, 2011		$	7,051			$	485			$	21,952			$	(110	)		$	1,506			$	30,884

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)

 

		Nine Months Ended
		September 30,
		2011				2010
CASH FLOWS FROM OPERATING ACTIVITIES
Net income		$	3,172			$	2,632
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses			454				203
Depreciation and amortization			322				370
Net accretion of securities premium			152				231
Net gain on disposition of other assets			(6	)			(67	)
Net realized gain on sales of securities			(12	)			(182	)
Earnings on life insurance			(260	)			(169	)
Increase in other assets			(140	)			(90	)
Increase (decrease) in other liabilities			1				268
Net cash provided by operating activities			3,683				3,196
CASH FLOWS FROM INVESTING ACTIVITIES
Securities held to maturity:
Maturities, calls and principal repayments			1,335				2,156
Purchases			(2,501	)			(1,504	)
Securities available for sale:
Maturities, calls and principal repayments			16,023				24,759
Purchases			(14,974	)			(26,362	)
Proceeds from sales			213				3,614
Net increase in loans receivable			(6,874	)			(12,213	)
Purchase of life insurance			—				(1,809	)
Net decrease in restricted investment in bank stocks			322				—
Proceeds from sale of other real estate owned			—				80
Purchases of premises and equipment			(1,059	)			(83	)
Net maturities of interest bearing time deposits			—				99
Net cash used in investing activities			(7,515	)			(11,263	)
CASH FLOWS FROM FINANCING ACTIVITIES
Net decrease in non-interest bearing demand and savings deposits			1,907				940
Net increase in time deposits			5,884				20,189
Net decrease in short-term borrowings			(1,180	)			(410	)
Repayment of long-term borrowings			(1,000	)			(6,000	)
Proceeds from issuance of common stock			84				59
Dividends paid			(780	)			(700	)
Net cash provided by financing activities			4,915				14,078
Net increase (decrease) in cash and cash equivalents			1,083				6,011
Cash and cash equivalents:
Beginning of year			10,554				8,633
End of period		$	11,637			$	14,644
SUPPLEMENTAL DISCLOSURES:
Cash payments for interest		$	4,494			$	5,345
Cash payments for income taxes		$	963			$	555
NON CASH INVESTING:
Transfer of loans to foreclosed real estate		$	249			$	24

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, 2011

Note A – Basis of Presentation

The consolidated financial statements include the accounts of First Community Financial Corporation (the “Corporation”) and its wholly-owned subsidiaries, The First National Bank of Mifflintown (the “Bank”) and First Community Financial Capital Trust I (the “Trust”). All material inter-company transactions have been eliminated. The 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, 2011 are not necessarily indicative of the results that may be expected for the year ending December 31, 2011.

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, 2010, included in the Corporation’s Form 10-K filed with the Securities and Exchange Commission on March 10, 2011.

The Corporation has evaluated events and transactions occurring subsequent to the balance sheet date of September 30, 2011, for items that should potentially be recognized or disclosed in these financial statements. The evaluation was conducted through November 11, 2011, the date these financial statements were issued.

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

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

 

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2011				2010				2011				2010
		(Dollars in Thousands)
Unrealized holding gains arising during the period		$	(70	)		$	189			$	204			$	631
Reclassification of gains realized in net income			—				—				(12	)			(182	)
			(70	)			189				192				449
Income tax effect			22				(67	)			(66	)			(155	)
Change in accumulated other comprehensive income		$	(48	)		$	122			$	126			$	294

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 was 1,404,838 for the nine months ended September 30, 2011 and 1,405,764 for the three months ended September 30, 2011. The weighted average number of shares outstanding was 1,401,485 for the nine months ended September 30, 2010 and 1,402,235 for the three months ended September 30, 2010.

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 risks 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 $185,000 of standby letters of credit outstanding as of September 30, 2011. 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, 2011 for guarantees under standby letters of credit issued is not material.

 

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Note F – Securities

Management determines the appropriate classification of debt securities at the time of purchase and re-evaluates such designation as of each balance sheet date. Securities available for sale are those securities that the Corporation intends to hold for an indefinite period of time, but not necessarily to maturity. Any decision to sell an available for sale security would be based on various factors. These securities are stated at fair value. Unrealized gains (losses) are reported as changes in other comprehensive income, a component of shareholders’ equity, net of the related deferred tax effect. Premiums and discounts are recognized as interest income over the estimated lives of the securities, using the interest method. Securities held to maturity are those securities that the Corporation has the intent and ability to hold to maturity. These securities are stated at cost adjusted for amortization of premiums and accretion of discounts, which is recognized as interest income over their estimated lives, using the interest method. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method.

Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 320, Investments – Debt and Equity Securities, clarifies the interaction of the factors that should be considered when determining whether a debt security is other-than-temporarily impaired. Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to (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) for equity securities, 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.

In instances when a determination is made that an other-than-temporary impairment exists, but the investor does not intend to sell the debt security and it is not more likely than not that it will be required to sell the debt security prior to its anticipated recovery, FASB Topic 320 changes the presentation and amount of the other-than-temporary impairment recognized in the income statement. The other-than-temporary impairment is separated into (a) the amount of the total other-than-temporary impairment related to a decrease in cash flows expected to be collected from the debt security (the credit loss) and (b) the amount of the total other-than-temporary impairment related to all other factors. The amount of the total other-than-temporary impairment related to the credit loss is recognized in earnings. The amount of the total other-than-temporary impairment related to all other factors is recognized in other comprehensive income.

 

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Amortized cost and fair value at September 30, 2011 and December 31, 2010 were as follows:

 

		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
		(In Thousands)
SECURITIES AVAILABLE FOR SALE:
September 30, 2011:
U.S. agency securities		$	5,871			$	217			$	—			$	6,088
Mortgage-backed securities			63,283				1,821				(16	)			65,088
Corporate securities			1,988				—				(109	)			1,879
Equity securities			640				406				—				1,046
		$	71,782			$	2,444			$	(125	)		$	74,101
December 31, 2010:
U.S. agency securities		$	9,738			$	180			$	—			$	9,918
Mortgage-backed securities			63,102				1,599				(41	)			64,660
Equity securities			661				388				—				1,049
		$	73,501			$	2,167			$	(41	)		$	75,627

 

		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
		(In Thousands)
SECURITIES HELD TO MATURITY:
September 30, 2011:
State and municipal securities		$	33,354			$	1,849			$	(405	)		$	34,798
		$	33,354			$	1,849			$	(405	)		$	34,798
December 31, 2010:
State and municipal securities		$	31,872			$	363			$	(1,259	)		$	30,976
		$	31,872			$	363			$	(1,259	)		$	30,976

 

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The following table shows the Corporation’s investments’ gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at September 30, 2011 and December 31, 2010:

 

		Less than 12 Months								12 Months or More								Total
		Fair Value				Unrealized Losses				Fair Value				Unrealized Losses				Fair Value				Unrealized Losses
September 30, 2011		(In Thousands)
SECURITIES AVAILABLE FOR SALE:
Corporate securities		$	1,879			$	109			$	—			$	—			$	1,879			$	109
Mortgage-backed securities			2,561				16				—				—				2,561				16
			4,440				125				—				—				4,440				125
SECURITIES HELD TO MATURITY:
State and municipal securities			606				11				3,483				394				4,089				405
Total		$	5,046			$	136			$	3,483			$	394			$	8,529			$	530

 

		Less than 12 Months								12 Months or More								Total
		Fair Value				Unrealized Losses				Fair Value				Unrealized Losses				Fair Value				Unrealized Losses
December 31, 2010		(In Thousands)
SECURITIES AVAILABLE FOR SALE:
Mortgage-backed securities		$	8,744			$	41			$	—			$	—			$	8,744			$	41
			8,744				41				—				—				8,744				41
SECURITIES HELD TO MATURITY:
State and municipal securities			15,135				530				2,280				729				17,415				1,259
Total		$	23,879			$	571			$	2,280			$	729			$	26,159			$	1,300

At September 30, 2011, five mortgage-backed securities have unrealized losses. The aggregate depreciation from the Corporation’s amortized cost basis on these securities is 0.4%. In management’s opinion, these unrealized losses relate to changes in interest rates. The Corporation’s mortgage backed security portfolio consists of only government sponsored agencies, and contains no private label securities.

At September 30, 2011, seventeen state and municipal securities have unrealized losses with aggregate depreciation of 9.1% from the Corporation’s amortized cost basis. In management’s opinion, these

 

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unrealized losses relate primarily to changes in interest rates. In analyzing the issuer’s financial condition, management considers the issuer’s bond rating as well as the financial performance of the respective municipality.

Gross realized gains and losses for the nine months ending September 30, 2011 and September 30, 2010 were as follows (in thousands):

 

		Gross Realized Gains				Gross Realized Losses				Net Gains (Losses)
September 30, 2011:
Equity securities		$	8			$	—			$	8
Mortgage-backed securities			4				—				4
		$	12			$	—			$	12
September 30, 2010:
Mortgage-backed securities		$	182			$	—			$	182
		$	182			$	—			$	182

Amortized cost and fair value at September 30, 2011 by contractual maturity are shown below. Municipal securities with prerefunded issues are included in the category in which payment is expected to occur. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay with or without penalties.

 

		Available for Sale								Held to Maturity
		Amortized Cost				Fair Value				Amortized Cost				Fair Value
		(In Thousands)
1 year or less		$	1,000			$	1,005			$	430			$	430
Over 1 year through 5 years			5,371				5,569				8,197				8,465
Over 5 years through 10 years			1,488				1,393				13,945				14,931
Over 10 years			—				—				10,782				10,972
Mortgage-backed securities			63,283				65,088				—				—
Equity securities			640				1,046				—				—
		$	71,782			$	74,101			$	33,354			$	34,798

 

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Note G – Loans

Allowance for loan losses at September 30, 2011 and loans receivable at September 30, 2011 and December 31, 2010 are as follows:

Allowance for Loan Losses:

 

		Commercial				Commercial Real Estate				Agricultural				Consumer				Residential Real Estate				Total
(in Thousands)
December 31, 2010 Total Allowance for loan losses		$	730			$	630			$	—			$	92			$	702			$	2,154
Provision			20				23				382				(8	)			37				454
Charge-offs			(18	)			—				(27	)			—				(24	)			(69	)
Recoveries			—				—				11				3				8				22
September 30, 2011 Total Allowance for loan losses		$	732			$	653			$	366			$	87			$	723			$	2,561
Ending balance for loans individually evaluated for impairment		$	262			$	244			$	—			$	—			$	—			$	506
Ending balance for loans collectively evaluated for impairment		$	470			$	409			$	366			$	87			$	723			$	2,055

Loans Receivable:

 

September 30, 2011		Commercial				Commercial Real Estate				Agricultural				Consumer				Residential				Total
(in Thousands)
Individually evaluated for impairment		$	262			$	4,484			$	856			$	—			$	—			$	5,602
Collectively evaluated for impairment			42,217				38,931				35,634				6,108				116,689				239,579
Total loans		$	42,479			$	43,415			$	36,490			$	6,108			$	116,689			$	245,181

 

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December 31, 2010		Commercial				Commercial Real Estate				Agricultural				Consumer				Residential				Total
(in Thousands)
Individually evaluated for impairment		$	111			$	186			$	—			$	—			$	—			$	297
Collectively evaluated for impairment			74,166				43,680			$	—				6,655				113,798				238,299
Total loans		$	74,277			$	43,866			$	—			$	6,655			$	113,798			$	238,596

Analysis of credit quality indicators is as follows:

 

September 30, 2011		Commercial				Commercial Real Estate				Agricultural				Consumer				Residential				Total
(in Thousands)
Pass		$	41,686			$	40,211			$	33,263			$	6,108			$	115,736			$	237,004
Special Mention			383				1,274				2,377				—				—				4,034
Substandard			410				1,930				850				—				953				4,143
Doubtful			—				—				—				—				—				—
Loss			—				—				—				—				—				—
Total		$	42,479			$	43,415			$	36,490			$	6,108			$	116,689			$	245,181

 

December 31, 2010		Commercial				Commercial Real Estate				Consumer				Residential				Total
		(in Thousands)
Pass		$	71,419			$	40,292			$	6,644			$	113,139			$	231,494
Special Mention			2,104				1,169				—				—				3,273
Substandard			754				2,405				11				659				3,829
Doubtful			—				—				—				—				—
Loss			—				—				—				—				—
Total loans		$	74,277			$	43,866			$	6,655			$	113,798			$	238,596

 

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The following is a summary of impaired loans:

 

September 30, 2011		Recorded Investment				Unpaid Principal Balance				Related Allowance				Average Recorded Investment				Interest Income Recognized
		(In Thousands)
With no specific allowance needed
Commercial		$	—			$	—			$	—			$	—			$	—
Commercial real estate			—				—				—				—				—
Agricultural			856				856				—				853				36
With an allowance recorded
Commercial			262				262				262				267				9
Commercial real estate			4,484				4,484				244				4,496				166
Total
Commercial			262				262				262				267				9
Commercial real estate			4,484				4,484				244				4,496				166
Agricultural			856				856				—				853				36
Total		$	5,602			$	5,602			$	506			$	5,616			$	211

 

December 31, 2010		Recorded Investment				Unpaid Principal Balance				Related Allowance				Average Recorded Investment				Interest Income Recognized
		(In Thousands)
With no specific allowance needed
Commercial		$	93			$	93			$	—			$	109			$	8
Commercial real estate			105				105				—				110				6
With an allowance recorded
Commercial			18				18				11				19				1
Commercial real estate			81				81				4				81				6
Total
Commercial			111				111				11				128				9
Commercial real estate			186				186				4				191				12
Total		$	297			$	297			$	15			$	319			$	21

 

		3 Months Ended								9 Months Ended
		September 30, 2011				September 30, 2010				September 30, 2010
		(In Thousands)
Average recorded investment		$	5,602			$	317			$	330
Interest income recognized		$	64			$	4			$	13

 

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Age analysis of past-due loans is as follows:

 

																										Allowance For Collectively Impaired Loans
September, 30, 2011		30 –  59 Days Past Due				60 –  89 Days Past Due				> 90 Days Past Due				Total Past Due				Current				Total Loans								>90 Days And Still Accruing				Nonaccruals
		(In Thousands)
Commercial		$	379			$	10			$	—			$	389			$	42,090			$	42,479			$	—			$	—			$	11
Commercial Real Estate			199				—				—				199				43,216				43,415				—				—				68
Agricultural			179				—				371				550				35,940				36,490				—				—				371
Residential			481				114				25				620				116,069				116,689				—				—				499
Consumer			23				5				1				29				6,079				6,108				—				—				11
Total		$	1,261			$	129			$	397			$	1,787			$	243,394			$	245,181			$	—			$	—			$	960

 

																										Allowance For Collectively Impaired Loans
December, 31, 2010		30 – 59 Days Past  Due				60 – 89 Days Past  Due				> 90 Days Past Due				Total Past Due				Current				Total Loans								>90 Days And Still Accruing				Nonaccruals
		(In Thousands)
Commercial		$	136			$	—			$	—			$	136			$	74,141			$	74,277			$	—			$	—			$	111
Commercial Real Estate			—				—				—				—				43,866				43,866				—				—				239
Residential			539				109				208				856				112,942				113,798				—				—				649
Consumer			99				29				17				145				6,510				6,655				—				—				17
Total		$	774			$	138			$	225			$	1,137			$	237,459			$	238,596			$	—			$	—			$	1,016

The following is a summary of Troubled Debt Restructurings:

Modifications

(In Thousands)

 

		Three Months Ended September 30, 2011												Nine Months Ended September 30, 2011
		Number of contracts				Pre-Modification Outstanding Recorded Investment				Post-Modification Outstanding Recorded Investment				Number of contracts				Pre-Modification Outstanding Recorded Investment				Post-Modification Outstanding Recorded Investment
Troubled Debt Restructurings Commercial - Mortgage			1				3,192				3,192				2				4,484				4,484
Troubled Debt Restructurings that Subsequently Defaulted			—				—				—				—				—				—

 

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Note H: Fair Value of Financial Instruments

Management uses its best judgment in estimating the fair value of the Corporation’s consolidated financial instruments; however, there are inherent weaknesses in any estimation technique. Therefore, for substantially all financial instruments, the fair value estimates herein are not necessarily indicative of the amounts the Bank could have realized in a sales transaction on the dates indicated. The estimated fair value amounts have been measured as of their respective period-ends and have not been re-evaluated or updated for purposes of these financial statements subsequent to those respective dates. As such, the estimated fair values of these financial instruments subsequent to the respective reporting dates may be different than the amounts reported at each period-end.

ASC Topic 820, Fair Value Measurements and Disclosure, which defines fair value, establishes a framework for measuring fair value under GAAP, expands disclosures about fair value measurements, and applies to other accounting pronouncements that require or permit fair value measurements. The Bank adopted Fair Value Measurements effective for its fiscal year beginning January 1, 2008.

Fair value measurement and disclosure guidance defines fair value as the price that would be received to sell the asset or transfer the liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. Additional guidance is provided on determining when the volume and level of activity for the asset or liability has significantly decreased. The Topic also includes guidance on identifying circumstances when a transaction may not be considered orderly.

Fair value measurement and disclosure provides a list of factors that a reporting entity should evaluate to determine whether there has been a significant decrease in the volume and level of activity for the asset or liability in relation to normal market activity for the asset or liability. When the reporting entity concludes there has been a significant decrease in the volume and level of activity for the asset or liability, further analysis of the information from that market is needed and significant adjustments to the related prices may be necessary to estimate fair value in accordance with fair value measurement and disclosure guidance.

ASC Topic 820 clarifies that when there has been a significant decrease in the volume and level of activity for the asset or liability, some transactions may not be orderly. In those situations, the entity must evaluate the weight of the evidence to determine whether the transaction is orderly. This Topic provides a list of circumstances that may indicate that a transaction is not orderly. A transaction price that is not associated with an orderly transaction is given little, if any, weight when estimating fair value.

 

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Fair value measurement and disclosure establishes a fair value hierarchy that prioritizes the inputs to valuation methods used to measure fair value. 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 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’s 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.

The following describes the valuation techniques used by the Corporation to measure certain financial assets and liabilities recorded at fair value on a recurring basis in the financial statements:

Securities available for sale: Securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted market prices, when available (Level 1). If quoted market prices are not available, fair values are measured utilizing independent valuation techniques of identical or similar securities for which significant assumptions are derived primarily from or corroborated by observable market data. Third party vendors compile prices from various sources and may determine the fair value of identical or similar securities by using pricing models that consider observable market data (Level 2). For certain securities which are not traded in active markets or are subject to transfer restrictions, valuations are adjusted to reflect illiquidity and/or transferability, and such adjustments are generally based on available market evidence (Level 3).

 

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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 September 30, 2011 and December 31, 2010 are as follows (in thousands):

 

Description		September 30, 2011				(Level 1) Quoted Prices in Active Markets for Identical Assets				(Level 2) Significant Other Observable Inputs				(Level 3) Significant Unobservable Inputs
U. S. agency securities		$	6,088			$	—				6,088			$	—
Mortgage-backed securities			65,088				—				65,088				—
Corporate securities			1,879				—				1,879				—
Equity securities			1,046				451				—				595
Securities available for sale		$	74,101			$	451			$	73,055			$	595

 

Description		December 31, 2010				(Level 1) Quoted Prices in Active Markets for Identical Assets				(Level 2) Significant Other Observable Inputs				(Level 3) Significant Unobservable Inputs
U. S. agency securities		$	9,918			$	—				9,918			$	—
Mortgage-backed securities			64,660				—				64,660				—
Equity securities			1,049				460				—				589
Securities available for sale		$	75,627			$	460			$	74,578			$	589

 

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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) for the periods ending September 30, 2011 and December 31, 2010 (in thousands).

 

		2011				2010
Fair Value, beginning of period		$	589			$	508
Total gains included in other comprehensive income			6				81
Purchases			—				—
Fair Value, end of period		$	595			$	589

The following describes the valuation techniques used by the Corporation to measure certain financial assets recorded at fair value on a nonrecurring basis in the financial statements:

Impaired Loans: Loans are designated as impaired when, in the judgment of management based on current information and events, it is probable that all amounts due according to the contractual terms of the loan agreement will not be collected. The measurement of loss associated with impaired loans can be based on either the observable market price of the loan or the fair value of the collateral. Fair value is measured based on the value of the collateral securing the loans. Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable. The value of real estate collateral is determined utilizing an income or market valuation approach based on an appraisal conducted by an independent, licensed appraiser outside of the Corporation using observable market data (Level 2). However, if the collateral is a house or building in the process of construction or if an appraisal of the real estate property is over two years old, then the fair value is considered Level 3. The value of business equipment is based upon an outside appraisal if deemed significant, or the net book value on the applicable business’ financial statements if not considered significant using observable market data. Likewise, values for inventory and accounts receivables collateral are based on financial statement balances or aging reports (Level 3). Impaired loans allocated to the Allowance for Loan Losses are measured at fair value on a nonrecurring basis. Any fair value adjustments are recorded in the period incurred as provision for loan losses on the Consolidated Statements of Income.

Certain assets such as real estate owned are measured at fair value less the cost to sell. Management believes that the fair value component in its valuation follows the provisions of ASC 820.

 

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Assets measured at fair value on a non-recurring basis at September 30, 2011 and December 31, 2010 are summarized below: (in thousands)

 

Description		September 30, 2011				(Level 1) Quoted Prices in Active Markets for Identical Assets				(Level 2) Significant Other Observable Inputs				(Level 3) Significant Unobservable Inputs
Impaired loans, net		$	5,096			$	—			$	—			$	5,096
Foreclosed real estate			358				—				—				358

 

Description		December 31, 2010				(Level 1) Quoted Prices in Active Markets for Identical Assets				(Level 2) Significant Other Observable Inputs				(Level 3) Significant Unobservable Inputs
Impaired loans, net		$	84			$	—			$	—			$	84
Foreclosed real estate			133				—				—				133

Total impaired loans had a carrying amount of $5,602,000 and $99,000, net of the valuation allowances of $506,000 and $15,000 as of September 30, 2011 and December 31, 2010, respectively. This resulted in additional provision for loan losses of $509,000 for the period ending September 30, 2011 and $0 for the period ending December 31, 2010.

ASC Topic 825, Financial Instruments, requires disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies, as well as in annual financial statements.

The following information should not be interpreted as an estimate of the fair value of the entire Corporation since a fair value calculation is only provided for a limited portion of the Corporation’s assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Corporation’s disclosures and those of other companies may not be meaningful. The following methods and assumptions were used to estimate the fair values of the Corporation’s financial instruments at September 30, 2011 and December 31, 2010.

 

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Cash and cash equivalents:

The carrying amounts reported in the balance sheet for cash and short-term instruments approximate those assets’ fair values.

Time certificates of deposit:

The carrying amount of time certificates of deposit approximate their fair value.

Securities:

For securities and marketable equity securities held for investment purposes, fair values are based on quoted market prices or dealer quotes. For other securities held as investments, fair value equals quoted market price, if available. If a quoted market price is not available, fair values are based on quoted market prices for similar securities. For securities which are not traded in active markets or are subject to transfer restrictions, valuations are generally based on available market evidence.

Loans receivable:

For variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. The fair values of fixed rate loans are estimated using discounted cash flow analyses, using interest rates currently being offered in the market for loans with similar terms to borrowers of similar credit quality. Fair values for nonperforming loans are estimated using discounted cash flow analyses or underlying collateral values, where applicable.

Restricted investment in bank stock:

The carrying amount of restricted investment in bank stock approximates fair value.

Accrued interest receivable and payable:

The carrying amount of accrued interest receivable and accrued interest payable approximates its fair value.

Deposit liabilities:

The fair values disclosed for demand deposits (e.g., interest and noninterest checking, passbook savings and money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered in the market on certificates to a schedule of aggregated expected monthly maturities on time deposits.

Short-term borrowings:

The carrying amounts of short-term borrowings approximate their fair values.

 

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Long-term debt:

Fair values of long-term debt are estimated using discounted cash flow analysis, based on rates currently available to the Corporation for advances from the FHLB with similar terms and remaining maturities.

Junior Subordinated debt:

Fair values of junior subordinated debt are estimated using discounted cash flow analysis, based on rates currently offered on such debt, with similar terms and remaining maturities. As the Corporation has the ability to redeem the junior subordinated debt at any time, the fair value approximates its carrying value.

Off-balance sheet financial instruments:

Fair values for the Corporation’s off-balance sheet financial instruments (lending commitments and letters of credit) are based on fees currently charged to enter into similar agreements taking into account the remaining terms of the agreements and the counterparties’ credit standing.

 

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The estimated fair values of the Corporation’s financial instruments were as follows at September 30, 2011 and December 31, 2010.

 

		2011								2010
		Carrying Amount				Fair Value				Carrying Amount				Fair Value
		(In Thousands)
Financial assets:
Cash and cash equivalents		$	11,637			$	11,637			$	10,554			$	10,554
Time certificates of deposit			198				198				198				198
Investment securities:
Available for sale			74,101				74,101				75,627				75,627
Held to maturity			33,354				34,798				31,872				30,976
Loans, net			242,402				244,374				236,231				237,323
Accrued interest receivable			1,249				1,249				1,337				1,337
Restricted investment in bank stocks			2,219				2,219				2,541				2,541
Total financial assets		$	365,160			$	368,576			$	358,360			$	358,556
Financial liabilities:
Deposits		$	325,640			$	330,392			$	317,849			$	322,934
Short-term borrowings			2,850				2,850				4,030				4,030
Long-term debt			15,000				16,840				16,000				17,561
Junior subordinated debt			5,155				5,155				5,155				5,155
Accrued interest payable			226				226				329				329
Total financial liabilities		$	348,871			$	355,463			$	343,363			$	350,009
Off-balance sheet financial instruments		$	—			$	—			$	—			$	—

Note I – New and Recently Adopted Accounting Pronouncements

In January 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2010-06, “Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements.” ASU 2010-06 amends Subtopic 820-10 to clarify existing disclosures, require new disclosures, and includes conforming amendments to guidance on employers’ disclosures about postretirement benefit plan assets. ASU 2010-06 is effective for interim and annual periods beginning after December 15, 2009, except for disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years. The adoption of the new guidance did not have a material impact on the Company’s consolidated financial statements.

 

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In July 2010, the FASB issued ASU 2010-20, “Receivables (Topic 310) – Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.” The new disclosure guidance significantly expands the existing requirements and will lead to greater transparency into an entity’s exposure to credit losses from lending arrangements. The extensive new disclosures of information as of the end of a reporting period became effective for both interim and annual reporting periods ending on or after December 15, 2010. Specific disclosures regarding activity that occurred before the issuance of the ASU, such as the allowance roll forward and modification disclosures, were required for periods beginning on or after December 15, 2010. The Company has included the required disclosures in its consolidated financial statements.

In December 2010, the FASB issued ASU 2010-28, “Intangible – Goodwill and Other (Topic 350) – When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts.” The amendments in this ASU modify Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. The amendments in this ASU are effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. Early adoption is not permitted. The adoption of the new guidance did not have a material impact on the Company’s consolidated financial statements.

In December 2010, the FASB issued ASU 2010-29, “Business Combinations (Topic 805) – Disclosure of Supplementary Pro Forma Information for Business Combinations.” The guidance requires pro forma disclosure for business combinations that occurred in the current reporting period as though the acquisition date for all business combinations that occurred during the year had been as of the beginning of the annual reporting period. If comparative financial statements are presented, the pro forma information should be reported as though the acquisition date for all business combinations that occurred during the current year had been as of the beginning of the comparable prior annual reporting period. ASU 2010-29 is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. Early adoption is permitted. The adoption of the new guidance did not have a material impact on the Company’s consolidated financial statements.

The Securities Exchange Commission (SEC) issued Final Rule No. 33-9002, “Interactive Data to Improve Financial Reporting.” The rule requires companies to submit financial statements in extensible business reporting language (XBRL) format with their SEC filings on a phased-in schedule. Large accelerated filers and foreign large accelerated filers using U.S. GAAP were required to provide interactive data reports starting with their first quarterly report for fiscal periods ending on or after June 15, 2010. All

 

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remaining filers are required to provide interactive data reports starting with their first quarterly report for fiscal periods ending on or after June 15, 2011. The Company complied with this Rule beginning with the filing of the June 30, 2011 Form 10-Q.

In March 2011, the SEC issued Staff Accounting Bulletin (SAB) 114. This SAB revises or rescinds portions of the interpretive guidance included in the codification of the Staff Accounting Bulletin Series. This update is intended to make the relevant interpretive guidance consistent with current authoritative accounting guidance issued as a part of the FASB’s Codification. The principal changes involve revision or removal of accounting guidance references and other conforming changes to ensure consistency of referencing through the SAB Series. The effective date for SAB 114 is March 28, 2011. The adoption of the new guidance did not have a material impact on the Company’s consolidated financial statements.

In April 2011, the FASB issued ASU 2011-02, “Receivables (Topic 310) – A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring.” The amendments in this ASU clarify the guidance on a creditor’s evaluation of whether it has granted a concession to a debtor. They also clarify the guidance on a creditor’s evaluation of whether a debtor is experiencing financial difficulty. The amendments in this ASU are effective for the first interim or annual period beginning on or after June 15, 2011. Early adoption is permitted. Retrospective application to the beginning of the annual period of adoption for modifications occurring on or after the beginning of the annual adoption period is required. As a result of applying these amendments, an entity may identify receivables that are newly considered to be impaired. For purposes of measuring impairment of those receivables, an entity should apply the amendments prospectively for the first interim or annual period beginning on or after June 15, 2011. The Company has adopted ASU 2011-02 and included the required disclosures in its consolidated financial statements.

In April 2011, the FASB issued ASU 2011-03, “Transfers and Servicing (Topic 860) – Reconsideration of Effective Control for Repurchase Agreements.” The amendments in this ASU remove from the assessment of effective control (1) the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee and (2) the collateral maintenance implementation guidance related to that criterion. The amendments in this ASU are effective for the first interim or annual period beginning on or after December 15, 2011. The guidance should be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date. Early adoption is not permitted. The Company is currently assessing the impact that ASU 2011-03 will have on its consolidated financial statements.

 

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In May 2011, the FASB issued ASU 2011-04, “Fair Value Measurement (Topic 820) – Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.” This ASU is the result of joint efforts by the FASB and IASB to develop a single, converged fair value framework on how (not when) to measure fair value and what disclosures to provide about fair value measurements. The ASU is largely consistent with existing fair value measurement principles in U.S. GAAP (Topic 820), with many of the amendments made to eliminate unnecessary wording differences between U.S. GAAP and IFRSs. The amendments are effective for interim and annual periods beginning after December 15, 2011 with prospective application. Early application is not permitted. The Company is currently assessing the impact that ASU 2011-04 will have on its consolidated financial statements.

In June 2011, the FASB issued ASU 2011-05, “Comprehensive Income (Topic 220) – Presentation of Comprehensive Income.” The objective of this ASU is to improve the comparability, consistency and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income by eliminating the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity. The amendments require that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The single statement of comprehensive income should include the components of net income, a total for net income, the components of other comprehensive income, a total for other comprehensive income, and a total for comprehensive income. In the two-statement approach, the first statement should present total net income and its components followed consecutively by a second statement that should present all the components of other comprehensive income, a total for other comprehensive income, and a total for comprehensive income. The amendments do not change the items that must be reported in other comprehensive income, the option for an entity to present components of other comprehensive income either net of related tax effects or before related tax effects, or the calculation or reporting of earnings per share. The amendments in this ASU should be applied retrospectively. The amendments are effective for fiscal years and interim periods within those years beginning after December 15, 2011. Early adoption is permitted because compliance with the amendments is already permitted. The amendments do not require transition disclosures. The Company is currently assessing the impact that ASU 2011-05 will have on its consolidated financial statements.

In August 2011, the SEC issued Final Rule No. 33-9250, “Technical Amendments to Commission Rules and Forms related to the FASB’s Accounting Standards Codification.” The SEC has adopted technical amendments to various rules and forms under the Securities Act of 1933, the Securities Exchange Act of 1934, and the Investment Company Act of 1940. These revisions were necessary to conform those rules and forms to the FASB Accounting Standards Codification. The technical amendments include revision

 

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of certain rules in Regulation S-X, certain items in Regulation S-K, and various rules and forms prescribed under the Securities Act, Exchange Act and Investment Company Act. The Release was effective as of August 12, 2011. The adoption of the release did not have a material impact on the Company’s consolidated financial statements.

In September 2011, the FASB issued ASU 2011-08, “Intangible – Goodwill and Other (Topic 350) – Testing Goodwill for Impairment.” The amendments in this ASU permit an entity to first assess qualitative factors related to goodwill to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill test described in Topic 350. The more-likely-than-not threshold is defined as having a likelihood of more than 50 percent. Under the amendments in this ASU, an entity is not required to calculate the fair value of a reporting unit unless the entity determines that it is more likely than not that its fair value is less than its carrying amount. The amendments in this ASU are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted, including for annual and interim goodwill impairment tests performed as of a date before September 15, 2010, if an entity’s financial statements for the most recent annual or interim period have not yet been issued. The Company is currently assessing the impact that ASU 2011-08 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

 

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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) legislative and regulatory changes (including the impact of the recently enacted Dodd-Frank Wall Street Reform and Consumer Protection Act and related regulations) which may result in increased compliance costs, (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 consolidated financial statements included in Form 10-K for the year ended December 31, 2010). 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.

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 if the impairment is due to credit concerns; if the impairment is due to other conditions the losses are recognized through other comprehensive income. 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 September 30, 2011.

 

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Financial Condition

Total assets of the Corporation increased $8,214,000 or 2.2% during the first nine months of 2011. Net loans increased $6,171,000 or 2.6%, securities decreased by $44,000 or and cash and cash equivalents increased $1,083,000 or 10.3% from December 31, 2010 to September 30, 2011.

Total deposits increased by $7,791,000 or 2.5% from December 31, 2010. Short-term borrowings decreased $1,180,000 or 29.3% and Long-term debt decreased $1,000,000 or 6.3% during the same time period. The growth in deposits can be attributed to the Corporation’s continuing business development endeavors as well as depositors’ search for a safe and stable return in light of the instability in the financial markets over the past year.

Non-Performing Assets

Non-performing assets include loans on a non-accrual basis, loans past due more than ninety days and still accruing, troubled debt restructurings and foreclosed real estate. These groups of assets represent the asset categories posing the greatest risk of loss to the Corporation. Non-accruing loans are loans no longer accruing interest due to apparent financial difficulties of the borrower. The Corporation generally discontinues accrual of interest when principal or interest becomes doubtful based on prevailing economic conditions and collection efforts. Loans are returned to accrual status only when all factors indicating doubtful collectibility cease to exist. Foreclosed real estate is acquired through foreclosure or in lieu of foreclosure and is recorded at fair value less costs to dispose at the date of foreclosure establishing a new cost basis. Gains on the sale of foreclosed real estate are included in other income, while losses and writedowns resulting from periodic revaluations are included in other expenses.

 

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The following table sets forth the Corporation’s non-performing assets as of the dates indicated:

 

		Non-Performing Assets (Dollars in Thousands)
		9/30/2011				12/31/2010
Non-accrual loans		$	960			$	1,016
Accruing loans 90 days past due			—				—
Total Non-Performing Loans			960				1,016
Foreclosed real estate			358				133
Total Non-Performing Assets		$	1,318			$	1,149
Restructured loans still accruing		$	4,484			$	1,312
Total non-performing and other risk assets		$	5,802			$	2,461
Ratios:
Non-performing loans to total loans			0.40	%			0.43	%
Non-performing assets to total loans and foreclosed real estate			0.54	%			0.49	%
Non-performing loans to allowance for loan losses			37.49	%			47.17	%

Total non-performing assets at September 30, 2011 increased $169,000 since December 31, 2010 as a result of a decrease in loans in non-accrual status and the increase in foreclosed real estate.

Results of Operations

Net income for the nine months ending September 30, 2011 was $3,172,000 or $2.26 per share compared to $2,632,000 or $1.88 per share for the same period in 2010. Annualized return on average equity was 14.35% for the first nine months of 2011 and 13.30% for the same period in 2010. Annualized return on average assets was 1.13% for the first nine months of 2011 and 0.98% for the same period in 2010.

Net income for the quarter ending September 30, 2011 was $1,090,000 or $0.78 per share compared to $1,000,000 or $0.71 per share for the same period in 2010. Annualized return on average equity was 14.15% for the third quarter of 2011 and 14.59% for the same period in 2010. Annualized return on average assets was 1.15% for the third quarter of 2011 and 1.09% for the same period in 2010.

 

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The following tables include average balances for the nine months ended September 30, 2011 and September 30, 2010 and quarters ending September 30, 2011 and September 30, 2010, rates and interest income and expense adjusted to an FTE basis, the interest rate spread, the net interest margin and the cost of funds:

Average Balances, Rates and Interest Income and Expense

(Dollars in Thousands)

(Nine Months ended September 30)

 

		2011												2010
		Average Balance				Interest				Yield/ Rate				Average Balance				Interest				Yield/ Rate
ASSETS
INTEREST EARNING ASSETS
Securities:
Taxable		$	71,268			$	1,687				3.16	%		$	75,829			$	1,909				3.37	%
Tax-exempt			32,578				1,564				6.42	%			29,027				1,447				6.66	%
Total Securities			103,846				3,251				4.19	%			104,856				3,356				4.28	%
Other			5,357				23				0.57	%			8,151				32				0.53	%
Loans:
Taxable			227,763				10,629				6.24	%			215,702				10,449				6.48	%
Tax-exempt			11,696				550				6.29	%			6,438				300				6.23	%
Total Loans			239,459				11,179				6.24	%			222,140				10,749				6.47	%
Total Interest Earning Assets			348,662				14,453				5.54	%			335,147				14,137				5.64	%
Non-interest earnings assets			26,368												25,099
Total Assets		$	375,030											$	360,246
LIABILITIES AND SHAREHOLDERS’ EQUITY
INTEREST BEARING LIABILITIES
Demand deposits, interest bearing		$	27,562			$	33				0.16	%		$	25,448			$	32				0.17	%
Savings deposits			103,043				687				0.89	%			81,561				655				1.07	%
Time deposits			156,669				3,087				2.63	%			167,742				3,776				3.01	%
Total Interest Bearing Deposits			287,274				3,807				1.77	%			274,751				4,463				2.17	%
Short-term borrowings			3,260				29				1.19	%			4,635				39				1.12	%
Long-term debt			20,452				595				3.89	%			23,954				740				4.13	%
Total Interest Bearing Liabilities			310,986				4,431				1.90	%			303,340				5,242				2.31	%
Demand deposits, non-interest bearing			31,671												27,861
Other liabilities			2,811												2,590
Shareholders’ equity			29,562												26,455
Total Liabilities and Shareholders’ Equity		$	375,030											$	360,246
NET INTEREST INCOME						$	10,022											$	8,895
INTEREST RATE SPREAD											3.64	%											3.33	%
NET INTEREST MARGIN											3.84	%											3.55	%
COST OF FUNDS											1.70	%											2.09	%

 

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Rate / Volume Analysis

Nine Months Ended September 30

2011 versus 2010

 

		Change Due to
		Rate				Volume				Total
Interest Earning Assets
Securities
Taxable		$	(114	)		$	(108	)		$	(222	)
Tax exempt			(53	)			170				117
Other			1				(10	)			(9	)
Total loans			(380	)			810				430
Total			(546	)			862				316
Interest Bearing Liabilities
Demand deposits interest bearing			(2	)			3				1
Savings deposits			(111	)			143				32
Time deposits			(471	)			(218	)			(689	)
Short – term borrowings			2				(12	)			(10	)
Long – term debt			(43	)			(102	)			(145	)
Total			(625	)			(186	)			(811	)
Net Interest Income		$	79			$	1,048			$	1,127

Net interest income for the first nine months of 2011 increased by $1,002,000 or 12.1% compared to the same period in 2010. 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 nine months of 2011, the net interest margin on a fully tax equivalent (FTE) basis was 3.84% compared to 3.55% for the same period in 2010. 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 increase in the net interest margin was the decrease in the cost of funds of 0.39% from 2.09% during the first nine months of 2010 to 1.70% during the same period in 2011, which was offset by a decrease in the yield on earning assets of 0.10% from 5.64% in 2010 to 5.54% in 2011.

 

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Average Balances, Rates and Interest Income and Expense

(Dollars in Thousands)

(Three Months ended September 30)

 

		2011												2010
		Average Balance				Interest				Yield/ Rate				Average Balance				Interest				Yield/ Rate
ASSETS
INTEREST EARNING ASSETS
Securities:
Taxable		$	70,971			$	573				3.20	%		$	75,682			$	629				3.30	%
Tax-exempt			33,480				535				6.34	%			28,974				476				6.52	%
Total Securities			104,451				1,108				4.21	%			104,656				1,105				4.19	%
Other			4,420				7				0.63	%			8,768				11				0.50	%
Loans:
Taxable			228,828				3,585				6.22	%			218,951				3,559				6.45	%
Tax-exempt			12,764				202				6.28	%			6,850				106				6.14	%
Total Loans			241,592				3,787				6.22	%			225,801				3,665				6.44	%
Total Interest Earning Assets			350,463				4,902				5.55	%			339,225				4,781				5.59	%
Non-interest earnings assets			26,997												25,586
Total Assets		$	377,460											$	364,811
LIABILITIES AND SHAREHOLDERS’ EQUITY
INTEREST BEARING LIABILITIES
Demand deposits, interest bearing		$	28,199			$	11				0.15	%		$	26,294			$	12				0.18	%
Savings deposits			107,394				241				0.89	%			90,839				216				0.94	%
Time deposits			152,633				934				2.43	%			163,183				1,148				2.79	%
Total Interest Bearing Deposits			288,226				1,186				1.63	%			280,316				1,376				1.95	%
Short-term borrowings			3,065				10				1.29	%			4,326				12				1.10	%
Long-term debt			20,155				197				3.88	%			21,394				217				4.02	%
Total Interest Bearing Liabilities			311,446				1,393				1.77	%			306,036				1,605				2.08	%
Demand deposits, non-interest bearing			32,494												28,874
Other liabilities			2,962												2,706
Shareholders’ equity			30,558												27,195
Total Liabilities and Shareholders’ Equity		$	377,460											$	364,811
NET INTEREST INCOME						$	3,509											$	3,176
INTEREST RATE SPREAD											3.77	%											3.51	%
NET INTEREST MARGIN											3.97	%											3.71	%
COST OF FUNDS											1.58	%											1.88	%

 

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Rate / Volume Analysis

Three Month ended September 30

2011 versus 2010

 

		Change Due to
		Rate				Volume				Total
Interest Earning Assets
Securities
Taxable		$	(18	)		$	(38	)		$	(56	)
Tax exempt			(13	)			72				59
Other			2				(6	)			(4	)
Total loans			(127	)			249				122
Total			(156	)			277				121
Interest Bearing Liabilities
Demand deposits interest bearing			(2	)			1				(1	)
Savings deposits			(12	)			37				25
Time deposits			(149	)			(65	)			(214	)
Short – term borrowings			2				(4	)			(2	)
Long – term debt			(8	)			(12	)			(20	)
Total			(169	)			(43	)			(212	)
Net Interest Income		$	13			$	320			$	333

Net interest income for the quarter ended September 30, 2011 increased by $280,000 compared to the same period in 2010. Net interest margin for the quarter ended September 30, 2011 was 3.97% compared to 3.71% during the same period in 2010. The decrease in the yield on earning assets from 5.59% for the three months ending September 30, 2010 to 5.55% for the same period in 2011 was more than offset by the decrease in the cost of funds from 1.88% during 2010 to 1.58% during 2011.

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 provision for loan losses of $454,000 for the first nine months of 2011 compared to $203,000 for the same time period in 2010. As a percentage of loans, the allowance for loan losses was 1.04% at September 30, 2011, compared to 0.90% at year-end 2010 and 0.88% at September 30, 2010. Impaired loans were $5,602,000 at September 30, 2011 compared to $297,000 at December 31, 2010. The increase in impaired loans of $5,305,000 is primarily the result of two troubled debt restructurings totaling $4,484,000, of which $3,192,000 carries an 80% USDA guarantee, and two agricultural loans. The impaired totals include the entire relationships with these four customers. At this time, no losses in excess of

 

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valuation allowance are anticipated. The Bank’s evaluation of the adequacy of the allowance for loan losses includes a review of all loans on at least a quarterly basis. For residential mortgage loans and consumer loans, the primary factors used to determine the adequacy of the allowance are delinquency, collateral value, general economic conditions and, where applicable, individual borrower information that is known to the Bank. For commercial loans and commercial real estate loans, the review includes financial performance of the borrower, payment history, collateral value, general economic conditions and more specific economic conditions affecting specific industries or business activities of the borrowers within the portfolio agreements. 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 2011 increased by $184,000 or 8.8% compared to the same period in 2010. Earnings on investment in life insurance increased $91,000. Income from fiduciary activities increased by $56,000 due to several estate settlements, and increased activity led to ATM card fees increasing by $40,000. Other income increased by $225,000 primarily due to an increase in mortgage servicing fees. These increases were offset by a decrease in realized gains on sales of securities of $170,000, and a decrease in gains on sales of foreclosed real estate of $61,000 during the first nine months of 2011 compared to the same period in 2010.

Non-interest income for the quarter ending September 30, 2011 was $775,000 compared to $675,000 in 2010. This increase is primarily related to the increases in earnings on investment in life insurance of $30,000, service charges on deposit accounts of $31,000 and an increase in other income of $83,000 due to an increase in mortgage servicing fees. The increases were offset by a decrease in gains on sales of foreclosed real estate of $67,000.

Total non-interest expense increased in the first nine months of 2011 by $275,000 compared to the first nine months of 2010. Employee compensation and benefits increased $341,000 in the first nine months of 2011 compared to 2010. The increase in salaries and wages is the result of merit increases as well as additional staff positions added to support recent loan and deposit growth. The FDIC/OCC expense decreased $131,000. The decrease in FDIC/OCC expense is due to the change in the deposit insurance assessment base effective the second quarter of 2011. 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 September 30, 2011, total non-interest expense increased $93,000 compared to the third quarter of 2010. The primary reasons for this increase were the increase in salaries and wages of

 

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$100,000 and an increase in professional fees of $12,000. This increase was offset by a decrease in FDIC/OCC expense of $61,000 resulting from the change in the assessment base in the second quarter of 2011.

Income tax expense was $861,000 for the nine month period ending September 30, 2011 compared to $741,000 for the same time period in 2010. Income tax expense as a percentage of income before income taxes was 21.3% for the period compared to 22.0% for 2010. The reason for the decrease in the effective tax rate is tax-exempt income as a percentage of income before taxes was higher in 2011 than 2010. 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.

Income tax expense was $290,000 for the three month period ending September 30, 2011 compared to $307,000 for the same time period in 2010. Income tax expense as a percentage of income before income taxes was 21.0% for the period compared to 23.5% for 2010. The reason for the decrease in the effective tax rate is tax-exempt income as a percentage of income before taxes was higher during the quarter in 2011 than 2010.

Liquidity

Liquidity represents the Corporation’s ability to efficiently manage cash flows to support customers’ loan demand, withdrawals by depositors, and 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 $325,640,000 in deposits at September 30, 2011, which increased $7,791,000 over total deposits of $317,849,000 at year-end 2010. Other sources of liquidity at September 30, 2011 includes the following: (1) investments in interest-bearing deposits with banks and federal funds sold, which totaled $3,495,000, (2) securities maturing in one year or less, which totaled $1,430,000, 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 an additional source of liquidity. Management is of the opinion that the Corporation’s liquidity is currently sufficient to meet its anticipated needs.

Capital

Total shareholders’ equity was $30,884,000 as of September 30, 2011, representing a $2,602,000 increase from December 31, 2010. The growth in capital was a result of net earnings retention of $2,392,000, an

 

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increase in accumulated other comprehensive income of $126,000 and an increase in common stock and surplus of $84,000 as a result of the Corporation’s dividend reinvestment plan. The increase in other comprehensive income is due to the increase in value of the Corporation’s available for sale securities.

At September 30, 2011, the Bank had a Tier I leverage ratio of 8.97%, a Tier I capital to risk-based assets ratio of 16.68% and a total capital to risk-based assets ratio of 17.93%. 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 Disclosures about Market Risk

(Not required of a smaller reporting company)

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 President and Chief Executive Officer (Principal Executive Officer) and Chief Financial Officer (Principal Financial Officer) have evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2011. 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 September 30, 2011, 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

There are no pending or threatened legal proceedings to which the Corporation or its subsidiaries is a party or to which the property of either the Corporation or its subsidiaries is subject to that, in the opinion of management, may materially impact the financial condition of either the Corporation or its subsidiaries.

Item 1A. Risk Factors

(Not required of a smaller reporting company)

 

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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

(a)

On January 8, 2008, the Board of Directors of the Corporation authorized a stock repurchase program pursuant to which the Corporation is authorized to purchase up to 7.1% of its outstanding shares or 100,000 shares. Share repurchases will be made from time to time and may be effected through open market purchases, block trades, or in privately negotiated transactions.

 

(b)

The table below sets forth the information with respect to purchases of common stock made by or on behalf of First Community Financial Corporation or any affiliated purchaser as defined in Rule 240-10b-18(a) (3) under Regulation S-K during the quarter ended September 30, 2011.

 

		Total Number of Shares Purchased				Average Price Paid Per Share				Total Number of Shares  Purchased as Part of a Publicly Announced Plan or Program				Maximum Number of Shares That May Yet be Purchased Under the Plan or Program
July 1 through July 30			0			$	0.00				0				96,349
August 1 through August 31			0			$	0.00				0				96,349
Sept. 1 through Sept. 30			0			$	0.00				0				96,349
Total for the period			0								0

Item 3. Defaults Upon Senior Securities

None

Item 4. Removed and Reserved

Item 5. Other Information

None

 

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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.
101		Interactive Data File - Furnished * herewith.

 

These interactive data files shall not be deemed filed for the purposes of Section 11 or 12 of the Securities Act of 1933, as amended, or Section 18 of the Securities Exchange act of 1934, as amended, or otherwise subject to liability under these sections.

 

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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: November 14, 2011				BY:		/s/ Jody D. Graybill
						Jody D. Graybill
						President and Chief Executive Officer
						(Principal Executive Officer)
Date: November 14, 2011				BY:		/s/ Richard R. Leitzel
						Richard R. Leitzel
						Vice President and Chief Financial Officer
						(Principal Financial Officer)

 

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Exhibit Index

 

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.
101		Interactive Data File - Furnished * herewith.

 

 

These interactive data files shall not be deemed filed for the purposes of Section 11 or 12 of the Securities Act of 1933, as amended, or Section 18 of the Securities Exchange act of 1934, as amended, or otherwise subject to liability under these sections.