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, 2010
¨ | 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). ¨ Yes ¨ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non- accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
| | | | | | |
Large accelerated filer | | ¨ | | Accelerated filer | | ¨ |
| | | |
Non-accelerated filer | | ¨ (Do not check if a smaller reporting company) | | Smaller reporting company | | x |
Indicate by check mark whether the registrant is a shell company (as defined in rule 12b-2 of the Exchange Act.) ¨ Yes x No
Indicate the number of shares outstanding of each class of issuer’s classes of common stock, as of the last practicable date:
| | |
Class | | Outstanding at October 31, 2010 |
Common Stock, par value $5.00 | | 1,402,979 Shares |
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
FIRST COMMUNITY FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars In Thousands, Except Share Data)
| | | | | | | | |
| | September 30, 2010 | | | December 31, 2009 | |
| | (unaudited) | | | (audited) | |
ASSETS | | | | | | | | |
Cash & due from banks | | $ | 6,480 | | | $ | 6,564 | |
Interest bearing deposits with banks | | | 1,069 | | | | 351 | |
Federal funds sold | | | 7,095 | | | | 1,718 | |
| | | | | | | | |
Cash & cash equivalents | | | 14,644 | | | | 8,633 | |
Time certificates of deposit | | | 297 | | | | 396 | |
Securities available for sale | | | 79,485 | | | | 81,437 | |
Securities held to maturity, fair value 2010 $ 30,868; 2009 $ 29,715 | | | 29,893 | | | | 30,204 | |
Loans - net of allowance for loan losses 2010 $ 2,019; 2009 $ 2,830 | | | 228,586 | | | | 216,600 | |
Premises & equipment, net | | | 5,888 | | | | 6,175 | |
Restricted investment in bank stocks | | | 2,661 | | | | 2,661 | |
Investment in life insurance | | | 7,050 | | | | 5,109 | |
Other assets | | | 4,604 | | | | 4,621 | |
| | | | | | | | |
| | |
TOTAL ASSETS | | $ | 373,108 | | | $ | 355,836 | |
| | | | | | | | |
| | |
LIABILITIES | | | | | | | | |
Deposits: | | | | | | | | |
Non-interest bearing | | $ | 28,892 | | | $ | 27,952 | |
Interest bearing | | | 288,696 | | | | 268,507 | |
| | | | | | | | |
Total deposits | | | 317,588 | | | | 296,459 | |
Short-term borrowings | | | 4,102 | | | | 4,512 | |
Long-term borrowings | | | 16,000 | | | | 22,000 | |
Junior subordinated debt | | | 5,155 | | | | 5,155 | |
Other liabilities | | | 2,620 | | | | 2,352 | |
| | | | | | | | |
| | |
TOTAL LIABILITIES | | | 345,465 | | | | 330,478 | |
| | | | | | | | |
| | |
SHAREHOLDERS’ EQUITY | | | | | | | | |
Preferred stock, without par value; 10,000,000 shares authorized and unissued | | | — | | | | — | |
Common stock, $ 5.00 par value; Shares authorized – 10,000,000 Shares issued - 2010 -1,406,630; 2009 – 1,404,348 Shares outstanding - 2010 -1,402,979; 2009-1,400,697 | | | 7,033 | | | | 7,022 | |
Capital in excess of par value | | | 398 | | | | 350 | |
Retained earnings | | | 18,752 | | | | 16,820 | |
Treasury stock, at cost 2010-3,651 shares; 2009-3,651 shares | | | (110 | ) | | | (110 | ) |
Accumulated other comprehensive income | | | 1,570 | | | | 1,276 | |
| | | | | | | | |
TOTAL SHAREHOLDERS’ EQUITY | | | 27,643 | | | | 25,358 | |
| | | | | | | | |
| | |
TOTAL LIABILITIES & SHAREHOLDERS’ EQUITY | | $ | 373,108 | | | $ | 355,836 | |
| | | | | | | | |
See accompanying notes.
2
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 September 30, | | | Nine Months Ended September 30, | |
| | 2010 | | | 2009 | | | 2010 | | | 2009 | |
INTEREST INCOME | | | | | | | | | | | | | | | | |
Interest & fees on loans | | $ | 3,629 | | | $ | 3,500 | | | $ | 10,647 | | | $ | 10,655 | |
Interest on taxable securities | | | 629 | | | | 793 | | | | 1,909 | | | | 2,349 | |
Interest on tax-exempt securities | | | 314 | | | | 306 | | | | 955 | | | | 835 | |
Other interest & dividends | | | 11 | | | | 15 | | | | 32 | | | | 40 | |
| | | | | | | | | | | | | | | | |
TOTAL INTEREST INCOME | | | 4,583 | | | | 4,614 | | | | 13,543 | | | | 13,879 | |
| | | | | | | | | | | | | | | | |
| | | | |
INTEREST EXPENSE | | | | | | | | | | | | | | | | |
Interest on deposits | | | 1,376 | | | | 1,881 | | | | 4,463 | | | | 5,635 | |
Interest on short term borrowings | | | 12 | | | | 12 | | | | 39 | | | | 38 | |
Interest on long term borrowings | | | 217 | | | | 309 | | | | 740 | | | | 934 | |
| | | | | | | | | | | | | | | | |
TOTAL INTEREST EXPENSE | | | 1,605 | | | | 2,202 | | | | 5,242 | | | | 6,607 | |
| | | | | | | | | | | | | | | | |
| | | | |
NET INTEREST INCOME | | | 2,978 | | | | 2,412 | | | | 8,301 | | | | 7,272 | |
Provision for loan losses | | | 89 | | | | 535 | | | | 203 | | | | 737 | |
| | | | | | | | | | | | | | | | |
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES | | | 2,889 | | | | 1,877 | | | | 8,098 | | | | 6,535 | |
| | | | | | | | | | | | | | | | |
| | | | |
NON-INTEREST INCOME | | | | | | | | | | | | | | | | |
Service charges on deposits | | | 171 | | | | 214 | | | | 567 | | | | 604 | |
Fiduciary activities | | | 102 | | | | 163 | | | | 372 | | | | 422 | |
Earnings on investment in life insurance | | | 58 | | | | 61 | | | | 169 | | | | 168 | |
ATM card fees | | | 165 | | | | 148 | | | | 474 | | | | 426 | |
Securities gains | | | — | | | | 185 | | | | 182 | | | | 459 | |
Gains on sales of other real estate owned | | | 67 | | | | — | | | | 67 | | | | — | |
Other income | | | 112 | | | | 81 | | | | 250 | | | | 264 | |
| | | | | | | | | | | | | | | | |
TOTAL OTHER INCOME | | | 675 | | | | 852 | | | | 2,081 | | | | 2,343 | |
| | | | | | | | | | | | | | | | |
| | | | |
NON-INTEREST EXPENSES | | | | | | | | | | | | | | | | |
Employee compensation & benefits | | | 1,170 | | | | 1,058 | | | | 3,397 | | | | 3,219 | |
Net occupancy & equipment | | | 272 | | | | 280 | | | | 851 | | | | 874 | |
ATM expense | | | 92 | | | | 99 | | | | 283 | | | | 290 | |
Professional fees | | | 101 | | | | 95 | | | | 331 | | | | 323 | |
Director & advisory boards compensation | | | 84 | | | | 83 | | | | 278 | | | | 232 | |
Supplies & postage | | | 80 | | | | 65 | | | | 238 | | | | 222 | |
FDIC and OCC assessments | | | 134 | | | | 181 | | | | 410 | | | | 572 | |
Other non-interest expenses | | | 324 | | | | 278 | | | | 1,018 | | | | 835 | |
| | | | | | | | | | | | | | | | |
TOTAL NON-INTEREST EXPENSES | | | 2,257 | | | | 2,139 | | | | 6,806 | | | | 6,567 | |
| | | | | | | | | | | | | | | | |
| | | | |
Income before income taxes | | | 1,307 | | | | 590 | | | | 3,373 | | | | 2,311 | |
Income tax expense | | | 307 | | | | 71 | | | | 741 | | | | 436 | |
| | | | | | | | | | | | | | | | |
NET INCOME | | $ | 1,000 | | | $ | 519 | | | $ | 2,632 | | | $ | 1,875 | |
| | | | | | | | | | | | | | | | |
| | | | |
Basic earnings per share | | $ | 0.71 | | | $ | 0.37 | | | $ | 1.88 | | | $ | 1.34 | |
| | | | | | | | | | | | | | | | |
Dividends per share | | $ | 0.17 | | | $ | 0.15 | | | $ | 0.50 | | | $ | 0.43 | |
| | | | | | | | | | | | | | | | |
See accompanying notes.
3
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, 2010 and 2009
(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, 2009 | | $ | 7,010 | | | $ | 293 | | | $ | 15,406 | | | $ | (62 | ) | | $ | 766 | | | $ | 23,413 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
Comprehensive income: | | | | | | | | | | | | | | | | | | | | | | | | |
Net income | | | | | | | | | | | 1,875 | | | | | | | | | | | | 1,875 | |
Change in net unrealized losses on securities available for sale, net of deferred income taxes | | | | | | | | | | | | | | | | | | | 407 | | | | 407 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total comprehensive income | | | | | | | | | | | | | | | | | | | | | | | 2,282 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
Issuance of stock in connection with Dividend reinvestment plan - 1,714 shares | | | 8 | | | | 43 | | | | | | | | | | | | | | | | 51 | |
Treasury stock acquired-1,601 shares | | | | | | | | | | | | | | | (48 | ) | | | | | | | (48 | ) |
Cash dividends, $0.43 per share | | | | | | | | | | | (601 | ) | | | | | | | | | | | (601 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
Balance, September 30, 2009 | | $ | 7,018 | | | $ | 336 | | | $ | 16,680 | | | $ | (110 | ) | | $ | 1,173 | | | $ | 25,097 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
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 gains on securities available for sale, net of deferred income taxes and reclassifications | | | | | | | | | | | | | | | | | | | 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 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
See accompanying notes.
4
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, | |
| | 2010 | | | 2009 | |
CASH FLOWS FROM OPERATING ACTIVITIES | | | | | | | | |
Net income | | $ | 2,632 | | | $ | 1,875 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | |
Provision for loan losses | | | 203 | | | | 737 | |
Depreciation and amortization | | | 370 | | | | 400 | |
Net accretion of securities premium | | | 231 | | | | (161 | ) |
Net realized gains on sales of securities | | | (182 | ) | | | (459 | ) |
Net gains on sales of other real estate owned | | | (67 | ) | | | — | |
Earnings on life insurance | | | (169 | ) | | | (168 | ) |
Increase in other assets | | | (90 | ) | | | (882 | ) |
Increase (decrease) in other liabilities | | | 268 | | | | (132 | ) |
| | | | | | | | |
Net cash provided by operating activities | | | 3,196 | | | | 1,210 | |
| | | | | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES | | | | | | | | |
Securities held to maturity: | | | | | | | | |
Maturities, calls and principal repayments | | | 2,156 | | | | 3,185 | |
Purchases | | | (1,504 | ) | | | (9,051 | ) |
Securities available for sale: | | | | | | | | |
Maturities, calls and principal repayments | | | 24,759 | | | | 14,793 | |
Purchases | | | (26,362 | ) | | | (34,256 | ) |
Proceeds from sales | | | 3,614 | | | | 8,981 | |
Net increase in loans receivable | | | (12,213 | ) | | | (43 | ) |
Purchase of life insurance | | | (1,809 | ) | | | — | |
Proceeds from sale of other real estate owned | | | 80 | | | | — | |
Purchases of premises and equipment | | | (83 | ) | | | (283 | ) |
Net maturities of interest bearing time deposits | | | 99 | | | | — | |
| | | | | | | | |
Net cash used in investing activities | | | (11,263 | ) | | | (16,674 | ) |
| | | | | | | | |
CASH FLOWS FROM FINANCING ACTIVITIES | | | | | | | | |
Net increase (decrease) in non-interest bearing demand and savings deposits | | | 940 | | | | (1,850 | ) |
Net increase in time deposits | | | 20,189 | | | | 32,730 | |
Net decrease in short-term borrowings | | | (410 | ) | | | (6,399 | ) |
Repayment of long-term borrowings | | | (6,000 | ) | | | — | |
Proceeds from issuance of common stock | | | 59 | | | | 51 | |
Acquisition of treasury stock | | | — | | | | (48 | ) |
Dividends paid | | | (700 | ) | | | (601 | ) |
| | | | | | | | |
Net cash provided by financing activities | | | 14,078 | | | | 23,883 | |
| | | | | | | | |
Net increase in cash and cash equivalents | | | 6,011 | | | | 8,419 | |
Cash and cash equivalents: | | | | | | | | |
Beginning of year | | | 8,633 | | | | 6,864 | |
| | | | | | | | |
End of period | | $ | 14,644 | | | $ | 15,283 | |
| | | | | | | | |
SUPPLEMENTAL DISCLOSURES: | | | | | | | | |
Cash payments for interest | | $ | 5,345 | | | $ | 6,709 | |
| | | | | | | | |
Cash payments for income taxes | | $ | 555 | | | $ | 759 | |
| | | | | | | | |
NON CASH INVESTING: | | | | | | | | |
Transfer of loans to foreclosed real estate | | $ | 24 | | | $ | 243 | |
| | | | | | | | |
See accompanying notes.
5
PART I – FINANCIAL INFORMATION, CONTINUED
Item 1. Financial Statements, continued
FIRST COMMUNITY FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
September 30, 2010
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. 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 accounting principles generally accepted in the United States of America 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 three and/or nine months ended September 30, 2010, are not necessarily indicative of the results that may be expected for the year ending December 31, 2010.
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, 2009, included in the Corporation’s Form 10-K filed with the Securities and Exchange Commission on March 15, 2010.
The Corporation has evaluated events and transactions occurring subsequent to the balance sheet date of September 30, 2010, for items that should potentially be recognized or disclosed in these financial statements. The evaluation was conducted through November 10, 2010, 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.
6
Note C – Comprehensive Income (Loss)
The only comprehensive income item that the Corporation presently has is unrealized gains (losses) on securities available for sale. The components of the change in unrealized gains (losses) are as follows:
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | | Nine Months Ended September 30, | |
| | 2010 | | | 2009 | | | 2010 | | | 2009 | |
| | (Dollars in Thousands) | |
| | | | |
Unrealized holding gains arising during the period | | $ | 189 | | | $ | 389 | | | $ | 631 | | | $ | 1,068 | |
Reclassification of gains realized in net income | | | — | | | | (185 | ) | | | (182 | ) | | | (459 | ) |
| | | | | | | | | | | | | | | | |
| | | 189 | | | | 204 | | | | 449 | | | | 609 | |
Income tax effect | | | (67 | ) | | | (64 | ) | | | (155 | ) | | | (202 | ) |
| | | | | | | | | | | | | | | | |
Change in accumulated other comprehensive income | | $ | 122 | | | $ | 140 | | | $ | 294 | | | $ | 407 | |
| | | | | | | | | | | | | | | | |
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 1,401,485 for the nine months ended September 30, 2010 and 1,402,235 for the three months ended September 30, 2010. The weighted average number of shares outstanding was 1,399,257 for the nine months ended September 30, 2009 and 1,399,408 for the three months ended September 30, 2009.
Note E – Guarantees
The Corporation does not issue any guarantees that would require liability recognition or disclosure, other than its standby letters of credit. Standby letters of credit written are conditional commitments issued by the Corporation to guarantee the performance of a customer to a third party. Generally, all letters of credit, when issued have expiration dates within one year. The credit risk involved in issuing letters of credit is essentially the same as those that are involved in extending loan facilities to customers. The Corporation, generally, holds collateral and/or personal guarantees supporting these commitments. The Corporation had $175,000 of standby letters of credit as of September 30, 2010. 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, 2010 for guarantees under standby letters of credit issued is not material.
7
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.
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.
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. For debt securities, management assesses whether (a) it has the intent to sell the security and (b) it is more likely than not that it will be required to sell the security prior to its anticipated recovery. These steps are done before assessing whether the entity will recover the cost basis of the investment. Previously, this assessment required management to assert it has both the intent and the ability to hold a security for a period of time sufficient to allow for an anticipated recovery in fair value to avoid recognizing an other-than-temporary impairment. This change does not affect the need to forecast recovery of the value of the security through either cash flows or market price.
8
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. FASB ASC Topic 320 was effective for the Corporation for interim and annual reporting periods June 30, 2009 and after. The adoption of this FASB ASC Topic did not impact the Corporation’s financial condition or results of operations.
Amortized cost and fair value at September 30, 2010 and December 31, 2009 were as follows:
| | | | | | | | | | | | | | | | |
| | Amortized Cost | | | Gross Unrealized Gains | | | Gross Unrealized Losses | | | Fair Value | |
| | (In Thousands) | |
| | | | |
SECURITIES AVAILABLEFOR SALE: | | | | | | | | | | | | | | | | |
September 30, 2010: | | | | | | | | | | | | | | | | |
U.S. agency securities | | $ | 11,950 | | | $ | 258 | | | $ | | | | $ | 12,208 | |
Mortgage-backed securities | | | 64,463 | | | | 1,825 | | | | (25 | ) | | | 66,263 | |
Equity securities | | | 661 | | | | 353 | | | | — | | | | 1,014 | |
| | | | | | | | | | | | | | | | |
| | | | |
| | $ | 77,074 | | | $ | 2,436 | | | $ | (25 | ) | | $ | 79,485 | |
| | | | | | | | | | | | | | | | |
| | | | |
December 31, 2009: | | | | | | | | | | | | | | | | |
U.S. agency securities | | $ | 12,195 | | | $ | 74 | | | $ | (38 | ) | | $ | 12,231 | |
Mortgage-backed securities | | | 66,619 | | | | 1,687 | | | | (72 | ) | | | 68,234 | |
Equity securities | | | 661 | | | | 311 | | | | — | | | | 972 | |
| | | | | | | | | | | | | | | | |
| | | | |
| | $ | 79,475 | | | $ | 2,072 | | | $ | (110 | ) | | $ | 81,437 | |
| | | | | | | | | | | | | | | | |
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| | | | | | | | | | | | | | | | |
| | Amortized Cost | | | Gross Unrealized Gains | | | Gross Unrealized Losses | | | Fair Value | |
| | (In Thousands) | |
SECURITIES HELDTO MATURITY: | | | | | | | | | | | | | | | | |
September 30, 2010: | | | | | | | | | | | | | | | | |
U.S. agency securities | | $ | 250 | | | $ | 2 | | | $ | — | | | $ | 252 | |
State and municipal securities | | | 29,643 | | | | 1,387 | | | | (414 | ) | | | 30,616 | |
| | | | | | | | | | | | | | | | |
| | | | |
| | $ | 29,893 | | | $ | 1,389 | | | $ | (414 | ) | | $ | 30,868 | |
| | | | | | | | | | | | | | | | |
| | | | |
December 31, 2009: | | | | | | | | | | | | | | | | |
U.S. agency securities | | $ | 250 | | | $ | 11 | | | $ | — | | | $ | 261 | |
State and municipal securities | | | 29,954 | | | | 374 | | | | (874 | ) | | | 29,454 | |
| | | | | | | | | | | | | | | | |
| | | | |
| | $ | 30,204 | | | $ | 385 | | | $ | (874 | ) | | $ | 29,715 | |
| | | | | | | | | | | | | | | | |
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, 2010 and December 31, 2009:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Less than 12 Months | | | 12 Months or More | | | Total | |
| | Fair Value | | | Unrealized Losses | | | Fair Value | | | Unrealized Losses | | | Fair Value | | | Unrealized Losses | |
September 30, 2010 | | (In Thousands) | |
| | | | | | |
SECURITIES AVAILABLEFOR SALE: | | | | | | | | | | | | | | | | | | | | | | | | |
Mortgage-backed securities | | $ | 3,819 | | | $ | 25 | | | $ | — | | | $ | — | | | $ | 3,819 | | | $ | 25 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
SECURITIES HELDTO MATURITY: | | | | | | | | | | | | | | | | | | | | | | | | |
State and municipal securities | | | 270 | | | | 1 | | | | 2,562 | | | | 413 | | | | 2,832 | | | | 414 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
Total | | $ | 4,089 | | | $ | 26 | | | $ | 2,562 | | | $ | 413 | | | $ | 6,651 | | | $ | 439 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
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| | | | | | | | | | | | | | | | | | | | | | | | |
| | Less than 12 Months | | | 12 Months or More | | | Total | |
| | Fair Value | | | Unrealized Losses | | | Fair Value | | | Unrealized Losses | | | Fair Value | | | Unrealized Losses | |
December 31, 2009 | | (In Thousands) | |
| | | | | | |
SECURITIES AVAILABLEFOR SALE: | | | | | | | | | | | | | | | | | | | | | | | | |
Mortgage-backed securities | | $ | 7,797 | | | $ | 71 | | | $ | 215 | | | $ | 1 | | | $ | 8,012 | | | $ | 72 | |
U. S. agency securities | | | 4,872 | | | | 38 | | | | — | | | | — | | | | 4,872 | | | | 38 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
| | | 12,669 | | | | 109 | | | | 215 | | | | 1 | | | | 12,884 | | | | 110 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
SECURITIES HELDTO MATURITY: | | | | | | | | | | | | | | | | | | | | | | | | |
State and municipal securities | | | 7,479 | | | | 119 | | | | 4,648 | | | | 755 | | | | 12,127 | | | | 874 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
Total | | $ | 20,148 | | | $ | 228 | | | $ | 4,863 | | | $ | 756 | | | $ | 25,011 | | | $ | 984 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
At September 30, 2010, four mortgage-backed securities have unrealized losses. The aggregate depreciation from the Corporation’s amortized cost basis on these securities is 0.7%. 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, 2010, sixteen state and municipal securities have unrealized losses with aggregate depreciation of 12.7% from the Corporation’s amortized cost basis. In management’s opinion, these 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, 2010 were as follows:
| | | | | | | | | | | | |
| | Gross Realized Gains | | | Gross Realized Losses | | | Net Gains (Losses) | |
| | | |
September 30, 2010: | | | | | | | | | | | | |
Mortgage-backed securities | | $ | 182 | | | $ | — | | | $ | 182 | |
| | | |
| | $ | 182 | | | $ | — | | | $ | 182 | |
| | | | | | | | | | | | |
Amortized cost and fair value at September 30, 2010 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.
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| | | | | | | | | | | | | | | | |
| | Available for Sale | | | Held to Maturity | |
| | Amortized Cost | | | Fair Value | | | Amortized Cost | | | Fair Value | |
| | (In Thousands) | |
| | | | |
1 year or less | | $ | 2,960 | | | $ | 2,992 | | | $ | 1,576 | | | $ | 1,590 | |
Over 1 year through 5 years | | | 8,221 | | | | 8,406 | | | | 4,098 | | | | 4,196 | |
Over 5 years through 10 years | | | 769 | | | | 810 | | | | 12,348 | | | | 13,054 | |
Over 10 years | | | — | | | | — | | | | 11,871 | | | | 12,028 | |
Mortgage-backed securities | | | 64,463 | | | | 66,263 | | | | — | | | | — | |
Equity securities | | | 661 | | | | 1,014 | | | | — | | | | — | |
| | | | | | | | | | | | | | | | |
| | | | |
| | $ | 77,074 | | | $ | 79,485 | | | $ | 29,893 | | | $ | 30,868 | |
| | | | | | | | | | | | | | | | |
Note G: 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.
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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.
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
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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).
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, 2010 and December 31, 2009 are as follows (in thousands):
| | | | | | | | | | | | | | | | |
Description | | September 30, 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 | | $ | 12,208 | | | $ | — | | | $ | 12,208 | | | $ | — | |
Mortgage-backed securities | | | 66,263 | | | | — | | | | 66,263 | | | | — | |
Equity securities | | | 1,014 | | | | 463 | | | | — | | | | 551 | |
| | | | | | | | | | | | | | | | |
| | | | |
Securities available for sale | | $ | 79,485 | | | $ | 463 | | | $ | 78,471 | | | $ | 551 | |
| | | | | | | | | | | | | | | | |
| | | | |
Description | | December 31, 2009 | | | (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 | | $ | 12,231 | | | $ | — | | | $ | 12,231 | | | $ | — | |
Mortgage-backed securities | | | 68,234 | | | | — | | | | 68,234 | | | | — | |
Equity securities | | | 972 | | | | 464 | | | | — | | | | 508 | |
| | | | | | | | | | | | | | | | |
| | | | |
Securities available for sale | | $ | 81,437 | | | $ | 464 | | | $ | 80,465 | | | $ | 508 | |
| | | | | | | | | | | | | | | | |
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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, 2010 and December 31, 2009.
| | | | | | | | |
| | 2010 | | | 2009 | |
| | |
Fair Value, beginning of period | | $ | 508 | | | $ | 425 | |
Total gains (losses) included in other comprehensive income | | | 43 | | | | (87 | ) |
Purchases | | | — | | | | 170 | |
| | | | | | | | |
Fair Value, end of period | | $ | 551 | | | $ | 508 | |
| | | | | | | | |
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 non-recurring 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, 2010 and December 31, 2009 are summarized below:
| | | | | | | | | | | | | | | | |
Description | | September 30, 2010 | | | (Level 1) Quoted Prices in Active Markets for Identical Assets | | | (Level 2) Significant Other Observable Inputs | | | (Level 3) Significant Unobservable Inputs | |
| | | | |
Impaired loans | | $ | 85 | | | $ | — | | | $ | — | | | $ | 85 | |
Foreclosed real estate | | | 24 | | | | — | | | | — | | | | 24 | |
| | | | |
Description | | December 31, 2009 | | | (Level 1) Quoted Prices in Active Markets for Identical Assets | | | (Level 2) Significant Other Observable Inputs | | | (Level 3) Significant Unobservable Inputs | |
| | | | |
Impaired loans | | $ | 1,394 | | | $ | — | | | $ | — | | | $ | 1,394 | |
Foreclosed real estate | | | 122 | | | | — | | | | — | | | | 122 | |
Total impaired loans, which are measured for impairment using the fair value of the collateral for collateral-dependent loans, had a carrying amount of $100,000 and $2,410,000, net of the valuation allowances of $15,000 and $1,016,000 as of September 30, 2010 and December 31, 2009, respectively. This resulted in additional provision for loan losses of $0 for the period ending September 30, 2010 and $1,000,000 for the period ending December 31, 2009.
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, 2010 and December 31, 2009.
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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 non-interest 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.
17
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.
The estimated fair values of the Corporation’s financial instruments were as follows at September 30, 2010 and December 31, 2009.
| | | | | | | | | | | | | | | | |
| | 2010 | | | 2009 | |
| | Carrying Amount | | | Fair Value | | | Carrying Amount | | | Fair Value | |
| | (In Thousands) | |
| | | | |
Financial assets: | | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 14,644 | | | $ | 14,644 | | | $ | 8,633 | | | $ | 8,633 | |
Time certificates of deposit | | | 297 | | | | 297 | | | | 396 | | | | 396 | |
Investment securities: | | | | | | | | | | | | | | | | |
Available for sale | | | 79,485 | | | | 79,485 | | | | 81,437 | | | | 81,437 | |
Held to maturity | | | 29,893 | | | | 30,868 | | | | 30,204 | | | | 29,715 | |
Loans, less allowance for loan losses | | | 228,586 | | | | 229,673 | | | | 216,600 | | | | 217,481 | |
Accrued interest receivable | | | 1,327 | | | | 1,327 | | | | 1,452 | | | | 1,452 | |
Restricted investment in bank stocks | | | 2,661 | | | | 2,661 | | | | 2,661 | | | | 2,661 | |
| | | | |
Financial liabilities: | | | | | | | | | | | | | | | | |
Deposits | | | 317,588 | | | | 322,842 | | | | 296,459 | | | | 301,750 | |
Short-term borrowings | | | 4,102 | | | | 4,102 | | | | 4,512 | | | | 4,512 | |
Long-term debt | | | 16,000 | | | | 17,933 | | | | 22,000 | | | | 23,519 | |
Junior subordinated debt | | | 5,155 | | | | 5,155 | | | | 5,155 | | | | 5,155 | |
Accrued interest payable | | | 340 | | | | 340 | | | | 443 | | | | 443 | |
| | | | |
Off-balance sheet financial instruments | | | — | | | | — | | | | — | | | | — | |
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Note H – New and Recently Adopted Accounting Pronouncements
In June 2009, the FASB issued new guidance relating to the accounting for transfers of financial assets. The new guidance, which was issued as SFAS No. 166, Accounting for Transfers of Financial Assets, an amendment to SFAS No. 140, was adopted into Codification in December 2009 through the issuance of Accounting Standards Updated (“ASU”) 2009-16. The new standard provides guidance to improve the relevance, representational faithfulness, and comparability of the information that an entity provides in its financial statements about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement, if any, in transferred financial assets. The Corporation adopted the new guidance in 2010 and it did not have a material impact on its consolidated financial statements.
In June 2009, the FASB issued new guidance relating to the variable interest entities. The new guidance, which was issued as SFAS No. 167, Amendments to FASB Interpretation No. 46(R), was adopted into Codification in December 2009. The objective of the guidance is to improve financial reporting by enterprises involved with variable interest entities and to provide more relevant and reliable information to users of financial statements. SFAS No. 167 was effective as of January 1, 2010. The adoption of the new guidance did not have a material impact on the Corporation’s consolidated financial statements.
In October 2009, the FASB issued ASU 2009-15, Accounting for Own-Share Lending Arrangements in Contemplation of Convertible Debt Issuance or Other Financing. ASU 2009-15 amends Subtopic 470-20 to expand accounting and reporting guidance for own-share lending arrangements issued in contemplation of convertible debt issuance. ASU 2009-15 is effective for fiscal years beginning on or after December 15, 2009 and interim periods within those fiscal years for arrangements outstanding as of the beginning of those fiscal years. The adoption of ASU 2009-15 did not have a material impact on the Corporation’s consolidated financial statements.
In January 2010, the FASB issued ASU 2010-04, Accounting for Various Topics – Technical Corrections to SEC Paragraphs. ASU 2010-04 makes technical corrections to existing SEC guidance including the following topics: accounting for subsequent investments, termination of an interest rate swap, issuance of financial statements - subsequent events, use of residential method to value acquired assets other than goodwill, adjustments in assets and liabilities for holding gains and losses, and selections of discount rate used for measuring defined benefit obligation. The adoption of ASU 2010-04 did not have a material impact on the Corporation’s consolidated financial statements.
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In January 2010, the FASB issued ASU No. 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 ASU 2010-06 did not have a material impact on the Corporation’s consolidated financial statements.
In February 2010, the FASB issued ASU 2010-09, “Subsequent Events (Topic 855): Amendments to Certain Recognition and Disclosure Requirements.” ASU 2010-09 addresses both the interaction of the requirements of Topic 855 with the SEC’s reporting requirements and the intended breadth of the reissuance disclosures provisions related to subsequent events. An entity that is an SEC filer is not required to disclose the date through which subsequent events have been evaluated. ASU 2010-09 is effective immediately. The adoption of the new guidance did not have a material impact on the Corporation’s consolidated financial statements.
In July 2010, the FASB issued ASU 2010-20, “Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.” The new disclosure guidance will significantly expand the existing requirements and will lead to greater transparency into a company’s exposure to credit losses from lending arrangements. The extensive new disclosures of information as of the end of a reporting period will become effective for both interim and annual reporting periods ending after December 15, 2010. Specific items regarding activity that occurred before the issuance of the ASU, such as the allowance rollforward and modification disclosures, will be required for periods beginning after December 15, 2010. The Corporation is currently assessing the impact that ASU 2010-20 will have on its consolidated financial statements.
On September 15, 2010, the SEC issued Release No. 33-9142, “Internal Control Over Financial Reporting In Exchange Act Periodic Reports of Non-Accelerated Filers.” This release issued a final rule adopting amendments to its rules and forms to conform them to Section 404(c) of the Sarbanes-Oxley Act of 2002 (SOX), as added by Section 989G of the Dodd-Frank Wall Street Reform and Consumer Protection Act. SOX Section 404(c) provides that Section 404(b) shall not apply with respect to any audit report prepared for an issuer that is neither an accelerated filer nor a large accelerated filer as defined in Rule 12b-2 under the Securities Exchange Act of 1934. Release No. 33-9142 was effective September 21, 2010.
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On September 17, 2010, the SEC issued Release No. 33-9144, “Commission Guidance on Presentation of Liquidity and Capital Resources Disclosures in Management’s Discussion and Analysis.” This interpretive release is intended to improve discussion of liquidity and capital resources in Management’s Discussion and Analysis of Financial Condition and Results of Operations in order to facilitate understanding by investors of the liquidity and funding risks facing the registrant. This release was issued in conjunction with a proposed rule, “Short-Term Borrowings Disclosures,” that would require public companies to disclose additional information to investors about their short-term borrowing arrangements. Release No. 33-9144 was effective on September 28, 2010.
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) 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.
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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, 2009). 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 judgment 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, 2010.
Financial Condition
Total assets of the Corporation increased $17,272,000 or 4.9% during the first nine months of 2010. Net loans increased $11,986,000 or 5.5%, securities decreased by $2,263,000 or 2.0% and cash and cash equivalents increased $6,011,000 or 69.6% from December 31, 2009 to September 30, 2010.
Total deposits increased by $21,129,000 or 7.1% from December 31, 2009. Long-Term Debt decreased $6,000,000 or 27.3% 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.
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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.
The following table sets forth the Corporation’s non-performing assets as of the dates indicated:
| | | | | | | | |
| | Non-Performing Assets (Dollars in Thousands) | |
| | 9/30/2010 | | | 12/31/2009 | |
| | |
Non-accrual loans | | $ | 1,382 | | | $ | 4,254 | |
Accruing loans 90 days past due | | | — | | | | — | |
| | | | | | | | |
| | |
Total Non-Performing Loans | | | 1,382 | | | | 4,254 | |
| | |
Foreclosed real estate | | | 133 | | | | 122 | |
| | | | | | | | |
| | |
Total Non-Performing Assets | | $ | 1,515 | | | $ | 4,376 | |
| | | | | | | | |
| | |
Ratios: | | | | | | | | |
Non-performing loans to total loans | | | 0.60 | % | | | 1.96 | % |
Non-performing assets to total loans and foreclosed real estate | | | 0.66 | % | | | 2.02 | % |
Non-performing loans to allowance for loan losses | | | 68.45 | % | | | 150.32 | % |
Total non-performing assets at September 30, 2010 decreased $2,861,000 since December 31, 2009 as a result of the decrease in loans in non-accrual status partially offset by the increase in foreclosed real estate. This decrease in non-accrual loans is primarily the result of the restructuring and partial charge-off of $924,000 of a loan to a manufacturer of inventory closely tied to the construction industry.
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Results of Operations
Net income for the nine months ending September 30, 2010 was $2,632,000 or $1.88 per share compared to $1,875,000 or $1.34 per share for the same period in 2009. Annualized return on average equity was 13.30% for the first nine months of 2010 and 10.31% for the same period in 2009. Annualized return on average assets was 0.98% for the first nine months of 2010 and 0.74% for the same period in 2009.
Net income for the quarter ending September 30, 2010 was $1,000,000 or $0.71 per share compared to $519,000 or $0.37 per share for the same period in 2009. Annualized return on average equity was 14.59% for the third quarter of 2010 and 8.27% for the same period in 2009. Annualized return on average assets was 1.09% for the third quarter of 2010 and 0.59% for the same period in 2009.
Net interest income for the first nine months of 2010 increased by $1,029,000 or 14.2% compared to the same period in 2009. 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 2010, the net interest margin on a fully tax equivalent (FTE) basis was 3.55% compared to 3.28% for the same period in 2009. 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 0.69% from 2.78% during the first nine months of 2009 to 2.09% during the same period in 2010, which was partially offset by a decrease in the yield on earning assets of 0.42% from 6.06% in 2009 to 5.64% in 2010.
Net interest income for the quarter ended September 30, 2010 increased by $566,000 compared to the same period in 2009. Net interest margin for the quarter ended September 30, 2010 was 3.71% compared to 3.16% during the same period in 2009. The decrease in the yield on earning assets from 5.85% during the third quarter of 2009 to 5.59% in 2010 was more than offset by the decrease in the cost of funds from 2.69% during 2009 to 1.88% during 2010.
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 $203,000 provision for loan losses for the first nine months of 2010 compared to $737,000 in 2009. As a percentage of loans, the allowance for loan losses was 0.88% at September 30, 2010, compared to 1.29% at year-end 2009 and 1.10% at September 30, 2009. The increase in the allowance for loan losses during 2009 was the recognition, restructuring and
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partial charge-off in 2010 of $924,000 of a loan to a manufacturer of inventory closely tied to the construction industry. Impaired loans were $311,000 at September 30, 2010 compared to $2,653,000 at December 31, 2009. Management feels impaired loans are adequately collateralized and loss in excess of valuation allowance is not 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 2010 decreased by $262,000 or 11.2% compared to the same period in 2009. Securities gains decreased $277,000, income from fiduciary activities decreased by $50,000, and service charges on deposit accounts decreased $37,000. These decreases were offset by an increase of $48,000 on ATM card fees and gains on sales of foreclosed real estate of $67,000.
Non-interest income for the quarter ending September 30, 2010 was $675,000 compared to $852,000 in 2009. This decrease is primarily related to the decrease in securities gains of $185,000, a decrease in income from fiduciary activities of $61,000, a decrease in service charges on deposit accounts of $43,000, offset by increases in ATM card fees of $17,000, gains on sales of foreclosed real estate of $67,000, and an increase in other income of $31,000.
Total non-interest expense increased in the first nine months of 2010 by $239,000 compared to the first nine months of 2009. Employee compensation and benefits increased $178,000 in the first nine months of 2010 compared to 2009. 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 assessments decreased $162,000 in the first nine months of 2010. The decrease in FDIC/OCC expense is because there was no special FDIC assessment in 2010 as there was in 2009. Director and advisory board compensation increased $46,000, supplies and postage increased $16,000, and other operating expenses increased $183,000. 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.
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During the quarter ending September 30, 2010, total non-interest expense increased $118,000 compared to the third quarter of 2009. The primary reasons for this increase are the increases in employee compensation and benefits of $112,000, an increase in other operating expenses of $46,000, and a decrease in FDIC/OCC expense of $47,000.
Income tax expense was $741,000 for the nine month time period ending September 30, 2010 compared to $436,000 for the same time period in 2009. Income tax expense as a percentage of income before income taxes was 22.0% for the period compared to 18.9% for 2009. The reason for the increase in the effective tax rate is tax-exempt income as a percentage of income before taxes was lower in 2010 than 2009. 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 $307,000 for the three month time period ending September 30, 2010 compared to $71,000 for the same time period in 2009. Income tax expense as a percentage of income before income taxes was 23.5% for the period compared to 12.0% for 2009. The reason for the increase in the effective tax rate is tax-exempt income as a percentage of income before taxes was higher during the quarter in 2010 than 2009.
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 $317,588,000 in deposits at September 30, 2010, which increased $21,129,000 over total deposits of $296,459,000 at year-end 2009. Other sources of liquidity at September 30, 2010 are available from the following: (1) investments in interest-bearing deposits with banks and federal funds sold, which totaled $8,461,000, (2) securities maturing in one year or less, which totaled $1,654,000, 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
Total shareholders’ equity was $27,643,000 as of September 30, 2010, representing a $2,285,000 increase from December 31, 2009. The growth in capital was a result of net earnings retention of $1,932,000, an
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increase in the accumulated other comprehensive income of $294,000, and an increase in common stock and surplus of $59,000 as a result of our dividend reinvestment plan. The increase in accumulated other comprehensive income is due to the change in value of the Corporation’s available for sale securities.
At September 30, 2010, the Bank had a leverage ratio of 8.32%, a Tier I capital to risk-based assets ratio of 15.25% and a total capital to risk-based assets ratio of 16.35%. 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. Planned capital expenditures are not expected to materially reduce capital ratios.
Item 3. Quantitative and Qualitative Disclosure about Market Risk
(Not required of a smaller reporting company.)
Item 4T. Controls and Procedures
We maintain a system of controls and procedures designed to provide reasonable assurance as to the reliability of the financial statements and other disclosures included in this report, as well as to safeguard assets from unauthorized use or disposition. The Corporation’s President (Principal Executive Officer) and Chief Financial Officer (Principal Financial Officer) have evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2010. 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, 2010, 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 Company authorized a stock repurchase program pursuant to which the Company 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 made by or on behalf of the Corporation or any affiliated purchaser as defined in Rule 240-10b-18(a) (3) under Regulation S-K of common stock during the quarter ended September 30, 2010. |
| | | | | | | | | | | | | | | | |
| | 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 31 | | | 0 | | | $ | 0.00 | | | | 0 | | | | 96,349 | |
| | | | |
August 1 through August 31 | | | 0 | | | $ | 0.00 | | | | 0 | | | | 96,349 | |
| | | | |
September 1 through September 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
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Item 5. Other Information
None.
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. | | 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. |
| |
10.1 | | Split Dollar Agreement between The First National Bank of Mifflintown and Jody Graybill, dated October 29, 2010. (Incorporated by reference to Exhibit 10.1 to the Corporation’s Current Report on Form 8-K as filed with the Securities and Exchange Commission on November 4, 2010.) |
| |
10.2 | | Director Revenue Neutral Retirement Agreement between The First National Bank of Mifflintown and Jody Graybill, dated October 29, 2010. (Incorporated by reference to Exhibit 10.2 to the Corporation’s Current Report on Form 8-K as filed with the Securities and Exchange Commission on November 4, 2010.) |
| |
10.3 | | First Amendment to the Second Amended and Restated Salary Continuation Agreement between The First National Bank of Mifflintown and Jody Graybill, dated October 29, 2010. (Incorporated by reference to Exhibit 10.3 to the Corporation’s Current Report on Form 8-K as filed with the Securities and Exchange Commission on November 4, 2010.) |
| |
10.4 | | First Amendment to the Second Amended and Restated Salary Continuation Agreement between The First National Bank of Mifflintown and Richard Leitzel, dated October 29, 2010. (Incorporated by reference to Exhibit 10.4 to the Corporation’s Current Report on Form 8-K as filed with the Securities and Exchange Commission on November 4, 2010.) |
| |
11. | | Information concerning the computation of earnings per share is provided in Note D to the Consolidated Financial Statements, which is included in Part I, Item 1 of Form 10-Q. |
| |
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). |
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| | |
31.2 | | Certification of Principal Financial Officer of First Community Financial Corporation Pursuant to Securities and Exchange Commission Rule 13a-14(a) / 15d-14(a). |
| |
32.1 | | Certification of Principal Executive Officer of First Community Financial Corporation Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| |
32.2 | | Certification of Principal Financial Officer of First Community Financial Corporation Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | | | | |
| | FIRST COMMUNITY FINANCIAL CORPORATION |
| | | | (Registrant) |
| | | |
Date:November 10, 2010 | | | | BY: | | /s/ Jody D. Graybill |
| | | | Jody D. Graybill |
| | | | President |
| | | | (Principal Executive Officer) |
| | | |
Date:November 10, 2010 | | | | BY: | | /s/ Richard R. Leitzel |
| | | | Richard R. Leitzel |
| | | | Vice President and Chief Financial Officer |
| | | | (Principal Financial Officer) |
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