First Community Financial (FMFP) 10-K 2012 FY Annual report

Exhibit 13

2012 Annual Report

First Community

Financial Corporation

TABLEOF CONTENTS

	Page
Management’s Letter to Shareholders	2
Your Partners in Success	4-5
Report of Management’s Assessment of Internal Control Over Financial Reporting	6
Report of Independent Registered Public Accounting Firm	7
December 31, 2012 and 2011	8
Consolidated Balance Sheets:
Years ended December 31, 2012 and 2011	9
Consolidated Statements of Income and Comprehensive Income:
Years ended December 31, 2012 and 2011	10
Consolidated Statements of Shareholders’ Equity:
Years ended December 31, 2012 and 2011	11
Consolidated Statements of Cash Flows:
Notes to Consolidated Financial Statements	12-50
Management’s Discussion and Analysis of Financial Condition and Results of Operations	51-66
Board of Directors:
First Community Financial Corporation	67
Officers:
First Community Financial Corporation	68
Officers:
The First National Bank of Mifflintown	69
Directors Emeriti and Advisory Boards	70
Bank, Loan Production and Trust & Investment Services Offices in Juniata, Mifflin and Perry Counties	71
Stock and Dividend Information	72

1

MANAGEMENT’S LETTER TO SHAREHOLDERS

Dear Shareholder:

Local People….Local Decisions… truly summarizes our vision of community banking and remains the foundation of our success. Our staff remains devoted to servicing the needs of our customers and shareholders while giving back to our local communities.

We believe that our commitment to our vision continues to drive our success. This success is evidenced by our financial results for 2012. Net income increased 9.3% over 2011 levels to a record $4.5 million, and earnings per share increased 9.15%, as well. Return on average shareholder’s equity (ROE) and Return on average assets (ROA) remained strong at 13.60% and 1.10%, respectively. Our strong performance over the past year has positioned our institution as a leader among our local and national peer groups. Our recent multi-year performance has resulted in our Bank being designated as one of the Top 200 Community Banks in the nation according toAmerican Banker Magazine (May 2012), which also placed our corporation 42nd overall based upon our three-year average ROE.

Our deposits and loans followed divergent paths in 2012 as our deposits increased 10.5%, climbing by over $34.5 million dollars. The influx in deposits seemed to reflect a cultural shift away from large financial institutions and towards local community organizations like ours. On the other hand, loan demand, which is generally fueled by consumer and business confidence, remained challenging during the past year, but credit quality remains strong. The challenging loan demand was offset by strong home mortgage refinancing activity, which exceeded expectations and positively affected our non-interest income for the year.

The corporation’s total assets ended 2012 at $420.7 million dollars, an increase of $32.8 million, or 8.5%, on a year over year basis.

By all measures, 2012 was an outstanding year for the First Community Financial Corporation family. Going forward, challenges remain. Our community and our country continue to face economic headwinds with slow and uncertain economic conditions. Loan demand continues to be soft, while regulatory costs continue to climb. Irrespective of this, we remain optimistic for the future. We believe that there is considerable opportunity for our company to continue to grow and to better serve our clients, employees, shareholders and the communities in which we operate.

With dedicated focus and commitment, we intend to improve as an organization, and continue to earn your investment and your support. Thank you!

John P. Henry III	Scott E. Fritz
Chairman	President & Chief Executive Officer

2

3

4

5

REPORTOF MANAGEMENT’S ASSESSMENTOF INTERNAL CONTROLOVER FINANCIAL REPORTING

First Community Financial Corporation is responsible for the preparation, integrity, and fair presentation of the consolidated financial statements included in this annual report. The consolidated financial statements and notes included in this annual report have been prepared in conformity with United States generally accepted accounting principles and necessarily include some amounts that are based on management’s best estimates and judgments.

We, as management of First Community Financial Corporation, are responsible for establishing and maintaining effective internal control over financial reporting that is designed to produce reliable financial statements in conformity with United States generally accepted accounting principles. Internal control over financial reporting includes those policies and procedures that pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Corporation; provide reasonable assurance that the transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles; provide a reasonable assurance that receipts and expenditures of the Corporation are only being made in accordance with authorizations of management and directors of the Corporation; and provide a reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Corporation’s assets that could have a material effect on the financial statements. The system of internal control over financial reporting as it relates to the financial statements is evaluated for effectiveness by management and tested for reliability through a program of internal audits. Actions are taken to correct potential deficiencies as they are noted.

Any system of internal control, no matter how well designed, has inherent limitations, including the possibility that a control can be circumvented or overridden and misstatements due to error or fraud may occur and not be detected. Also, because of changes in conditions, internal control effectiveness may vary over time. Accordingly, even an effective system of internal control will provide only a reasonable assurance with respect to financial statement preparation.

Management assessed the Corporation’s system of internal control over financial reporting as of December 31, 2012, in relation to the criteria for effective control over financial reporting as described in “Internal Control – Integrated Framework,” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management concludes that, as of December 31, 2012, its system of internal control over financial reporting is effective and meets the criteria of the “Internal Control – Integrated Framework.”

This Annual Report does not include an attestation report of the Corporation’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Corporation’s registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Corporation to provide only management’s report in this Annual Report.

/s/ Scott E. Fritz

Scott E. Fritz

President and Chief Executive Officer

(Principal Executive Officer)

/s/ Richard R. Leitzel

Richard R. Leitzel

Senior Vice President and Chief Financial Officer

(Principal Financial Officer)

March 7, 2013

6

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of

First Community Financial Corporation

Mifflintown, Pennsylvania

We have audited the accompanying consolidated balance sheets of First Community Financial Corporation and its subsidiaries as of December 31, 2012 and 2011, and the related consolidated statements of income and comprehensive income, shareholders’ equity, and cash flows for each of the years then ended. First Community Financial Corporation’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Corporation is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Corporation’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of First Community Financial Corporation and its subsidiaries as of December 31, 2012 and 2011 and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

/s/ Smith Elliott Kearns & Company, LLC

Chambersburg, Pennsylvania

March 7, 2013

7

FIRST COMMUNITY FINANCIAL CORPORATION

CONSOLIDATED BALANCE SHEETS

	December 31,
	2012			2011
	(In Thousands, Except Share Data)
Assets
Cash and due from banks	$	13,395		$	9,129
Interest-bearing demand deposits		2,246			218
Federal funds sold		2,148			591
Cash and Cash Equivalents		17,789			9,938
Time certificates of deposit		198			198
Securities available for sale		86,436			73,804
Securities held to maturity, fair value 2012 $53,486; 2011 $36,639		50,648			34,972
Loans		245,944			251,012
Less: Allowance for loan losses		(2,794	)		(3,085	)
Less: Deferred loan fees and costs, net		(215	)		(224	)
Net loans		242,935			247,703
Premises and equipment, net		8,116			7,461
Restricted investment in bank stocks		1,794			2,121
Investment in life insurance		8,250			7,399
Other assets		4,539			4,287
Total Assets	$	420,705		$	387,883
Liabilities and Shareholders’ Equity
LIABILITIES
Deposits:
Non-interest bearing	$	40,348		$	35,994
Interest-bearing		324,780			294,555
Total Deposits		365,128			330,549
Short-term borrowings		2,410			2,685
Long-term debt		10,000			15,000
Junior subordinated debt		5,155			5,155
Other liabilities		3,204			3,056
Total Liabilities		385,897			356,445
COMMITMENTSAND CONTINGENCIES		—			—
SHAREHOLDERS’ EQUITY
Preferred stock, without par value; 10,000,000 shares authorized and unissued		—			—
Common stock, $5 par value; 10,000,000 shares authorized; Shares issued, 2012 – 1,416,018; 2011 – 1,411,526 Shares outstanding, 2012 – 1,412,362; 2011 – 1,407,870		7,080			7,058
Capital in excess of par value		677			522
Retained earnings		25,802			22,652
Treasury stock, at cost 2012 – 3,656 shares; 2011 – 3,656 shares		(110	)		(110	)
Accumulated other comprehensive income		1,359			1,316
Total Shareholders’ Equity		34,808			31,438
Total Liabilities and Shareholders’ Equity	$	420,705		$	387,883

See notes to consolidated financial statements 8

FIRST COMMUNITY FINANCIAL CORPORATION

CONSOLIDATED STATEMENTSOF INCOMEAND COMPREHENSIVE INCOME

	Years Ended December, 31,
	2012			2011
	(In Thousands, Except per Share Data)
INTEREST INCOME
Loans, including fees	$	14,472		$	14,740
Securities:
Taxable		1,940			2,237
Tax exempt		1,568			1,383
Other		41			31
Total Interest Income		18,021			18,391
INTEREST EXPENSE
Deposits		4,637			4,982
Short-term borrowings		37			39
Long-term debt		801			793
Total Interest Expense		5,475			5,814
Net Interest Income		12,546			12,577
PROVISIONFOR LOAN LOSSES		324			982
Net Interest Income after Provision for Loan Losses		12,222			11,595
OTHER INCOME
Service charges on deposits		783			776
Fiduciary activities		498			525
Earnings on investment in life insurance		302			341
ATM and debit card fees		568			531
Investment securities gains from sales		166			12
Realized gains on sales of assets		36			6
Other		1,006			762
Total Other Income		3,359			2,953
OTHER EXPENSES
Employee compensation and benefits		5,443			4,998
Net occupancy and equipment		1,230			1,097
Professional fees		467			504
Director and advisory boards compensation		380			353
ATM expenses		168			188
Supplies and postage		333			326
FDIC/OCC expense		345			352
Pennsylvania bank shares tax		298			307
Other operating		1,225			1,182
Total Other Expenses		9,889			9,307
Income before Income Taxes		5,692			5,241
PROVISIONFOR INCOME TAXES		1,160			1,095
Net Income	$	4,532		$	4,146
Other Comprehensive Income
Unrealized gains or losses on investment securities, net of tax		153			(56	)
Reclassification adjustment, net of tax		(110	)		(8	)
Total Other Comprehensive Income		43			(64	)
Total Comprehensive Income		4,575			4,082
BASIC EARNINGSPER SHARE	$	3.22		$	2.95
DIVIDENDSPER SHARE	$	0.980		$	0.750

See notes to consolidated financial statements 9

FIRST COMMUNITY FINANCIAL CORPORATION

CONSOLIDATED STATEMENTSOF SHAREHOLDERS’ EQUITY

	Common Stock		Capital In Excess of Par Value		Retained Earnings			Treasury Stock			Accumulated Other Comprehensive Income			Total
			(In Thousands, Except per Share Data)
Balance – January 1, 2011	$	7,037	$	415	$	19,560		$	(110	)	$	1,380		$	28,282
Comprehensive income:
Net income						4,146									4,146
Change in net unrealized gains on securities available for sale, net of deferred income taxes												(64	)		(64	)
Total comprehensive income															4,082
Issuance of stock in connection with dividend reinvestment plan 4,109 shares		21		107											128
Cash dividends, $0.750 per share						(1,054	)								(1,054	)
Balance, December 31, 2011	$	7,058	$	522	$	22,652		$	(110	)	$	1,316		$	31,438
Comprehensive income:
Net income						4,532									4,532
Change in net unrealized gains on securities available for sale, net of deferred income taxes												43			43
Total comprehensive income															4,575
Issuance of stock in connection with dividend reinvestment plan 4,492 shares		22		155											177
Cash dividends, $0.98 per share						(1,382	)								(1,382	)
Balance, December 31, 2012	$	7,080	$	677	$	25,802		$	(110	)	$	1,359		$	34,808

See notes to consolidated financial statements 10

FIRST COMMUNITY FINANCIAL CORPORATION

CONSOLIDATED STATEMENTSOF CASH FLOWS

	Years Ended December 31,
	2012			2011
	(In Thousands)
CASH FLOWSFROM OPERATING ACTIVITIES
Net income	$	4,532		$	4,146
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation of premises and equipment		539			432
Amortization of intangible assets		—			14
Net amortization of investment securities		424			174
Earnings on investment in life insurance		(302	)		(341	)
Realized gains on securities		(166	)		(12	)
Realized gains on sales of assets		(36	)		(6	)
Provision for loan losses		324			982
Deferred income taxes		151			(222	)
(Increase) decrease in accrued interest receivable and other assets		(521	)		478
Increase in accrued interest payable and other liabilities		148			217
Net Cash Provided by Operating Activities		5,093			5,862
CASH FLOWSFROM INVESTING ACTIVITIES
Securities available for sale:
Proceeds from maturities, calls and principal repayments		22,288			19,234
Proceeds from sales		3,948			213
Purchases		(39,376	)		(18,300	)
Securities held to maturity:
Proceeds from maturities, calls and principal repayments		290			1,960
Purchases		(15,650	)		(4,640	)
Net (increase) decrease in loans		4,341			(12,703	)
Purchases of premises and equipment		(1,194	)		(2,091	)
Proceeds from sale of foreclosed real estate		285			—
Purchase of life insurance		(600	)		—
Net dispositions of restricted investment in bank stocks		327			420
Net Cash Used in Investing Activities		(25,341	)		(15,907	)
CASH FLOWSFROM FINANCING ACTIVITIES
Net increase in deposits		34,579			12,700
Net decrease in short-term borrowings		(275	)		(1,345	)
Repayment of long-term debt		(5,000	)		(1,000	)
Proceeds from issuance of common stock		177			128
Cash dividends paid		(1,382	)		(1,054	)
Net Cash Provided by Financing Activities		28,099			9,429
Net Increase (decrease) in Cash and Cash Equivalents		7,851			(616	)
CASHAND CASH EQUIVALENTS – BEGINNING		9,938			10,554
CASHAND CASH EQUIVALENTS – ENDING	$	17,789		$	9,938
SUPPLEMENTARY CASH FLOWS INFORMATION
Interest paid	$	5,515		$	5,845
Income taxes paid	$	1,039		$	1,389
Non-cash investing activities
Transfers from loans to foreclosed real estate	$	103		$	249

See notes to consolidated financial statements 11

FIRST COMMUNITY FINANCIAL CORPORATION

NOTESTO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES

First Community Financial Corporation (the Corporation) through its wholly-owned subsidiary, The First National Bank of Mifflintown (the Bank), provides loan, deposit, trust and other related financial services through twelve full service banking offices in Juniata and Perry Counties of Pennsylvania. The Corporation’s other subsidiary, First Community Financial Capital Trust I (the Trust), was established during December 2003 for the purpose of issuing $5,000,000 of trust preferred securities. The Corporation is subject to regulation and supervision by the Federal Reserve Board and the Bank is subject to regulation and supervision by the Office of the Comptroller of the Currency.

Principles of Consolidation

The consolidated financial statements include the accounts of the Corporation, and its wholly-owned subsidiaries, the Bank and the Trust. In consolidation, significant intercompany accounts and transactions between the Bank and the Corporation have been eliminated. The Trust qualifies as a variable interest entity and is accounted for under the provisions of GAAP. The subordinated debt of the Trust is reflected as a liability of the Corporation.

Subsequent Events

The Corporation has evaluated events and transactions occurring subsequent to the balance sheet date of December 31, 2012, for items that should potentially be recognized or disclosed in these financial statements. The evaluation was conducted through the date these financial statements were issued.

Basis of Accounting

The Corporation uses the accrual basis of accounting.

Estimates

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the balance sheet dates, and the reported amounts of income and expenses for the years then ended. Actual results could differ from those estimates. The material estimates that are particularly susceptible to significant change in the near term are the determination of the allowance for loan losses, the evaluation of other-than-temporary impairment of securities, foreclosed real estate and deferred tax assets.

Trust Assets

Assets held by the Trust Department in an agency or fiduciary capacity for its customers are excluded from the consolidated financial statements since they do not constitute assets of the Corporation. The market value of assets held by the Trust Department amounted to $77,948,000 and $101,875,000 at December 31, 2012 and 2011, respectively. Income from fiduciary activities is recognized on the accrual method.

Significant Group Concentrations of Credit Risk

Most of the Corporation’s activities are with customers located within the Central Pennsylvania region. Note 3 discusses the types of securities that the Corporation invests in. Note 4 discusses the types of lending that the Corporation engages in. The Corporation does not have any significant concentrations in any one industry or customer.

12

FIRST COMMUNITY FINANCIAL CORPORATION

NOTESTO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Cash and Cash Equivalents

Cash and cash equivalents includes cash and due from banks, interest bearing demand deposits, federal funds sold and investments with an original maturity of 90 days or less. Federal funds are typically purchased and sold for one day periods. At times, the Corporation may have due from bank balances with its correspondent banks that exceed the federally insured limits.

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.

Other than temporary impairment (OTTI) loss is recognized in earnings through the income statement in the period in which OTTI loss is taken, except for the non-credit component of OTTI losses on debt securities, which are recognized in other comprehensive income.

Time Certificates of Deposit

Time certificates of deposit are carried at cost, which approximates fair value.

Loans

The Bank grants commercial, residential and consumer loans to customers primarily within Juniata and Perry Counties of Pennsylvania and the surrounding area. A large portion of the loan portfolio is secured by real estate. Although the Bank has a diversified loan portfolio, its debtors’ ability to honor their contracts is influenced by the region’s economy.

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are stated at their outstanding unpaid principal balances, net of an allowance for loan losses and any deferred fees or costs. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of related costs, are deferred and recognized as an adjustment of the yield (interest income) of the related loans. The Corporation is generally amortizing these amounts over the contractual life of the loan.

13

FIRST COMMUNITY FINANCIAL CORPORATION

NOTESTO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Loans (Continued)

The accrual of interest is generally discontinued when the contractual payment of principal or interest has become 90 to 120 days past due or management has serious doubts about further collectability of principal or interest, even though the loan is currently performing. A loan may remain on accrual status if it is in the process of collection and is either guaranteed or well secured. When a loan is placed on non-accrual status, unpaid interest credited to income is reversed. Interest received on non-accrual loans generally is either applied against principal or reported as interest income, according to management’s judgment as to the collectability of principal. Generally, loans are restored to accrual status when the obligation is brought current, has performed in accordance with the contractual terms for a reasonable period of time and the ultimate collectability of the total contractual principal and interest is no longer in doubt.

Allowance for Loan Losses

The allowance for loan losses is established through provisions for loan losses charged against income. Loans deemed to be uncollectible are charged against the allowance for loan losses, and subsequent recoveries, if any, are credited to the allowance.

The allowance for loan losses is maintained at a level considered adequate to provide for losses that can be reasonably anticipated. Management’s periodic evaluation of the adequacy of the allowance is based on the Corporation’s past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, composition of the loan portfolio, current economic conditions and other relevant factors. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant change, including the amounts and timing of future cash flows expected to be received on impaired loans.

Loans are risk rated by a universal bank grading system, (1-9), endorsed by federal agencies. Level 1 is a loan with minimal risk, 2 – moderate risk, 3 – average risk, 4 – acceptable risk, 5 – marginally acceptable risk (grades 1 – 5 are considered pass loans), 6 – Other Assets Especially Mentioned, (potential weaknesses identified), 7 – Substandard (well defined weaknesses), 8 – Doubtful, (unlikely to be paid in full), 9 – Loss, (will not be paid in full).

A formal review by an independent third-party is conducted semi-annually. Quarterly, all criticized and classified loans are reviewed by management.

The allowance consists of specific and general components. There have been no significant changes in management’s methodology for evaluating the allowance for loan losses from prior periods. The specific component relates to loans that are classified as impaired. For such loans, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value for that loan. The general component covers non-classified loans and is based on historical loss experience adjusted for qualitative factors. Individual portfolio segments are evaluated on a rolling quarterly basis that values internal and external qualitative factors including: historical losses; trends in loan volume and mix, past due loans, watch and criticized loans and economic factors; and changes in lending personnel, underwriting processes, underlying collateral and loan policies.

Loans classified special mention and below are reviewed for possible impairment. A commercial loan is considered impaired when, based on current information and events, it is probable that the

14

FIRST COMMUNITY FINANCIAL CORPORATION

NOTESTO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Allowance for Loan Losses (Continued)

Corporation will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for commercial, financial and agricultural loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price or the fair value of the collateral if the loan is collateral dependent.

A Troubled Debt Restructuring, (TDR), identification process has been established to determine whether a debtor is experiencing financial difficulty and, if so, whether the Bank has granted a concession to the borrower by modifying their loan. Then, mitigating factors are evaluated to determine a final conclusion as to whether the loan is a restructured troubled debt.

Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Corporation does not separately identify individual installment and residential loans for impairment disclosures unless such loans are the subject of a restructuring agreement.

In April 2011, the FASB issued ASU 2011-02, ACreditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring.This guidance clarifies which loan modifications constitute troubled debt restructurings and is intended to assist creditors in determining whether a modification of the terms of a receivable meets the criteria to be considered a troubled debt restructuring, both for the purpose of recording an impairment charge and for disclosure of troubled debt restructurings. In evaluating whether a restructuring constitutes a troubled debt restructuring, a creditor must separately conclude, under the guidance clarified by ASU 2011-02, that both of the following exist: (a) the restructuring constitutes a concession; and (b) the debtor is experiencing financial difficulties. The adoption of the provisions of ASU 2011-02 is effective for the first interim or annual period beginning on or after June 15, 2011. In accordance with ASU 2011-02, the Corporation adopted the provisions of ASU 2011-02 in the quarter ending September 30, 2011. The amendments in ASU No. 2011-02 require retrospective application to January 1, 2011 of the impairment measurement guidance in FASB ASC 310-10-35 for those receivables newly identified as impaired. As a result of adoption of ASU 2011-02, the Corporation did not identify any newly considered impaired loans that had previously been collectively evaluated for impairment consistent with the guidance in FASB ASC 450-20.

Restricted Investment in Bank Stocks

Restricted investment in bank stocks represents required investments in the common stock of correspondent banks, consisting of the Federal Reserve Bank of Philadelphia in the amount of $258,500, Atlantic Central Bankers Bank in the amount of $20,000, and the Federal Home Loan Bank (FHLB) of Pittsburgh in the amount of $1,515,100. No readily available market exists for these stocks. These restricted investments are carried at cost.

15

FIRST COMMUNITY FINANCIAL CORPORATION

NOTESTO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Restricted Investment in Bank Stocks (Continued)

Management evaluates the restricted stock for impairment in accordance with FASB ASC Topic 942,Financial Services – Depository and Lending. Management’s determination of whether these investments are impaired is based on their assessment of the ultimate recoverability of their cost rather than by recognizing temporary declines in value. The determination of whether a decline affects the ultimate recoverability of their cost is influenced by criteria such as (1) the significance of the decline in net assets of the FHLB as compared to the capital stock amount for the FHLB and the length of time this situation has persisted, (2) commitments by the FHLB to make payments required by law or regulation and the level of such payments in relation to the operating performance of the FHLB, and (3) the impact of legislative and regulatory changes on institutions and, accordingly, on the customer base of the FHLB.

Management believes no impairment charge is necessary related to its restricted stock as of December 31, 2012.

Premises and Equipment

Land is carried at cost. Premises and equipment are stated at cost less accumulated depreciation computed on the straight-line method over the estimated useful lives of the assets. Leasehold improvements are depreciated over the shorter of the estimated useful lives or the lease terms. Maintenance and repairs are expensed when incurred and expenditures for significant improvements are capitalized.

Foreclosed Real Estate

Foreclosed real estate includes assets acquired through foreclosure and loans identified as in- substance foreclosures. A loan is classified as in-substance foreclosure when the Corporation has taken possession of the collateral regardless of whether formal foreclosure proceedings have taken place. Foreclosed real estate is initially valued at its estimated fair market value, net of selling costs, at the time of foreclosure, establishing the property’s new basis. Subsequent to foreclosure, valuations are periodically performed by management and the foreclosed assets are carried at the lower of carrying amount or fair value less cost to sell. 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. Foreclosed real estate, which is included in other assets, amounted to $212,000 at December 31, 2012 and $358,000 in 2011.

Transfers of Financial Assets

Transfers of financial assets are accounted for as sales, when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Corporation, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Corporation does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.

Advertising Costs

The Corporation charges the costs of advertising to expense as incurred. Advertising expense was $124,000 and $115,000 for the years ended December 31, 2012 and 2011, respectively.

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NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Income Taxes

Deferred income taxes are provided on the liability method whereby deferred tax assets are recognized for deductible temporary differences and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax basis. Deferred tax assets are reduced by a valuation allowance, when in the opinion of management, it is more likely than not that some portion or all the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted through the provision for income taxes for the effects of changes in tax laws and rates on the date of enactment.

Earnings per Share

The Corporation has a simple capital structure. Basic earnings per share represents net income divided by the weighted average number of common shares outstanding during the period. The weighted average number of common shares outstanding was 1,409,487 and 1,405,302 for the years ended 2012 and 2011.

Segment Reporting

Management does not separately allocate expenses, including the cost of funding loan demand, between the commercial, retail, trust and other operations of the Corporation. As such, discrete financial information is not available and segment reporting would not be meaningful.

Comprehensive Income

Accounting principles generally accepted in the United States of America generally require that recognized revenue, expenses, gains and losses be included in net income. Changes in certain assets and liabilities, such as unrealized gains (losses) on securities available for sale, are reported as a separate component of the equity section of the balance sheet. Such items, along with net income, are components of comprehensive income.

The components of other comprehensive income and the related tax effects are as follows:

	Years Ended December 31,
	2012			2011
	(In Thousands)
Unrealized holding gains (losses) on available for sale securities	$	232		$	(82	)
Reclassification adjustment for gains realized in net income		(166	)		(12	)
Net Unrealized Gains (Losses)		66			(94	)
Tax effect		(23	)		30
Net of Tax Amount	$	43		$	(64	)

Loans Serviced

The Bank administers secondary market mortgage programs available through the Federal Home Loan Bank of Pittsburgh and offers residential mortgage products and services to customers. The Bank originates single-family residential mortgage loans for immediate sale in the secondary market,

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NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Loans Serviced (Continued)

and retains the servicing of those loans. At December 31, 2012 and 2011, the balance of loans serviced for others was $49,452,000 and $30,687,000 respectively. The estimated fair value of mortgage servicing rights (MSRs) related to loans sold and serviced by the Corporation is recorded as an asset upon sale of such loans. MSRs are amortized as a reduction to servicing income over the estimated lives of the underlying loans. MSRs are evaluated periodically for impairment, by comparing the carrying amount to the estimated fair value.

Off Balance Sheet Financial Instruments

In the ordinary course of business, the Corporation has entered into off balance sheet financial instruments consisting of commitments to extend credit and standby letters of credit. Such financial instruments are recorded in the financial statements when they become payable.

Fair Value Measurements

Fair values of financial instruments are estimated using relevant information and assumptions, as more fully disclosed in Note 13. Fair value estimates involve uncertainties and matters of significant judgment. Changes in assumptions or in market conditions would significantly affect the estimates.

Reclassifications

Certain reclassifications have been made to prior period balances to conform to the current year presentation.

New and Recently Adopted Accounting Pronouncements

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 was not permitted. The adoption of the new guidance did not have a material impact on the Corporation’s consolidated financial statements.

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 International Accounting Standards Board (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 International Financial Reporting Standards (IFRS). The amendments are effective for interim and annual periods beginning after December 15, 2011 with prospective application. Early application was not permitted. The Corporation has included the required disclosures in its consolidated financial statements.

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NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

New and Recently Adopted Accounting Policies (Continued)

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 was permitted because compliance with the amendments was already permitted. The amendments do not require transition disclosures. The Corporation has included the required disclosures in its 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 was permitted, including for annual and interim goodwill impairment tests performed as of a date before September 15, 2011, if an entity’s financial statements for the most recent annual or interim period had not yet been issued. The adoption of the new guidance did not have a material impact on the Corporation’s consolidated financial statements.

In December 2011, the FASB issued ASU 2011-11, “Balance Sheet (Topic 210) – Disclosures about Offsetting Assets and Liabilities.” This ASU requires entities to disclose both gross information and net information about both instruments and transactions eligible for offset in the balance sheet and instruments and transactions subject to an agreement similar to a master netting arrangement. An entity is required to apply the amendments for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. An entity should provide the disclosures required by those amendments retrospectively for all comparative periods presented. The Corporation does not expect the adoption of ASU 2011-11 to have a material impact on its consolidated financial statements.

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NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

New and Recently Adopted Accounting Policies (Continued)

In December 2011, the FASB issued ASU 2011-12, “Comprehensive Income (Topic 220) – Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05.” The amendments are being made to allow the Board time to re-deliberate whether to present on the face of the financial statements the effects of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income for all periods presented. While the Board is considering the operational concerns about the presentation requirements for reclassification adjustments and the needs of financial statement users for additional information about reclassification adjustments, entities should continue to report reclassifications out of accumulated other comprehensive income consistent with the presentation requirements in effect before ASU 2011-05. All other requirements in ASU 2011-05 are not affected by ASU 2011-12, including the requirement to report comprehensive income either in a single continuous financial statement or in two separate but consecutive financial statements. Public entities should apply these requirements for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Corporation has included the required disclosures in its consolidated financial statements.

In July 2012, the FASB issued ASU 2012-02, “Intangibles – Goodwill and Other (Topic 350) – Testing Indefinite-Lived Intangible Assets for Impairment.” The objective of this amendment is to reduce the cost and complexity of performing an impairment test for indefinite-lived intangible assets by simplifying how an entity tests those assets for impairment and to improve consistency in impairment testing guidance among long-lived asset categories. The amendments permit an entity first to assess qualitative factors to determine whether it is more likely than not that an indefinite-lived tangible asset is impaired as a basis for determining whether it is necessary to perform the quantitative impairment test in accordance with Subtopic 350-30, Intangibles – Goodwill and Other – General Intangibles Other than Goodwill. The more-likely-than-not threshold is defined as having a likelihood of more than 50 percent. Previous guidance in Subtopic 350-30 required an entity to test indefinite-lived intangible assets for impairment, on at least an annual basis, by comparing the fair value of the asset with its carrying amount. If the carrying amount of the intangible asset exceeds its fair value, an entity should recognize an impairment loss in the amount of that excess. In accordance with the amendments in this ASU, an entity will have an option not to calculate annually the fair value of an indefinite-lived intangible asset if the entity determines that it is not more likely than not that an asset is impaired. Permitting an entity to assess qualitative factors when testing indefinite-lived intangible assets for impairment results in guidance that is similar to the goodwill impairment testing guidance in ASU 2011-08. The amendments in this ASU are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted, including for annual and interim impairment tests performed as of a date before July 27, 2012, if a public entity’s financial statements for the most recent annual or interim period have not yet been issued. The Corporation does not expect the adoption of ASU 2012-02 to have a material impact on its consolidated financial statements.

In October 2012, the FASB issued ASU 2012-06, “Business Combinations (Topic 805): Subsequent Accounting for an Indemnification Asset Recognized at the Acquisition Date as a Result of a Government-Assisted Acquisition of a Financial Institution.” The amendments in this ASU clarify the applicable guidance for subsequently measuring an indemnification asset recognized as a result of a

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NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

New and Recently Adopted Accounting Policies (Continued)

government-assisted acquisition of a financial institution. In addition, the amendments should resolve current diversity in practice on the subsequent measurement of these types of indemnification assets. The amendments are effective for fiscal years, and interim periods within those years, beginning on or after December 15, 2012. Early adoption is permitted. The amendments should be applied prospectively to any new indemnification assets acquired after the date of adoption and to indemnification assets existing as of the date of adoption arising from a government-assisted acquisition of a financial institution. The Corporation does not expect the adoption of ASU 2012-06 to have a material impact on its consolidated financial statements.

In January 2013, the FASB issued ASU 2013-01, “Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities.” The amendments in this ASU clarify the scope for derivatives accounted for in accordance with Topic 815, Derivatives and Hedging, including bifurcated embedded derivatives, repurchase agreements and reverse repurchase agreements and securities borrowing and securities lending transactions that are either offset or subject to netting arrangements. An entity is required to apply the amendments for fiscal years, and interim periods within those years, beginning on or after January 1, 2013. The Corporation does not expect the adoption of ASU 2013-01 to have a material impact on its consolidated statements.

In February 2013, the FASB issued ASU 2013-02, “Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.” The amendments in this ASU require an entity to present (either on the face of the statement where net income is presented or in the notes) the effects on the line items of net income of significant amounts reclassified out of accumulated other comprehensive income. In addition, the amendments require a cross-reference to other disclosures currently required for other reclassification items to be reclassified directly to net income in their entirety in the same reporting period. Public companies should apply these amendments for fiscal years, and interim periods within those years, beginning on or after December 15, 2012. The Corporation is currently assessing the impact that ASU 2013-02 will have on its consolidated financial statements

NOTE 2 - RESTRICTIONSON CASHAND DUEFROM BANKS

In return for services obtained through correspondent banks, the Corporation is required to maintain non-interest bearing cash balances in those correspondent banks. At December 31, 2012 and 2011, compensating balances approximated $2,900,000 and $1,866,000, respectively. During 2012 average required balances totaled $2,265,000 and during 2011 totaled $1,758,000.

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NOTE 3 - SECURITIES

Amortized cost and fair value at December 31, 2012 and December 31, 2011 were as follows:

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(In Thousands)
SECURITIES AVAILABLEFOR SALE:
December 31, 2012:
U.S. agency securities	$	3,616	$	115	$	—		$	3,731
Mortgage-backed securities		78,090		1,628		(52	)		79,666
Corporate securities		1,991		4		(27	)		1,968
Equity securities		640		431		—			1,071
	$	84,337	$	2,178	$	(79	)	$	86,436
December 31, 2011:
U.S. agency securities	$	5,496	$	169	$	—		$	5,665
Mortgage-backed securities		63,647		1,680		(15	)		65,312
Corporate securities		1,989		—		(217	)		1,772
Equity securities		640		415		—			1,055
	$	71,772	$	2,264	$	(232	)	$	73,804

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(In Thousands)
SECURITIES HELDTO MATURITY:
December 31, 2012:
State and municipal securities	$	50,648	$	3,025	$	(187	)	$	53,486
	$	50,648	$	3,025	$	(187	)	$	53,486
December 31, 2011:
State and municipal securities	$	34,972	$	2,082	$	(415	)	$	36,639
	$	34,972	$	2,082	$	(415	)	$	36,639

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NOTE 3 - SECURITIES (CONTINUED)

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 December 31, 2012 and December 31, 2011:

	Less than 12 Months				12 Months or More				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
December 31, 2012	(In Thousands)
SECURITIES AVAILABLEFOR SALE:
Corporate securities	$	—	$	—	$	975	$	27	$	975	$	27
Mortgage-backed securities		9,015		52		—		—		9,015		52
		9,015		52		975		27		9,990		79
SECURITIES HELDTO MATURITY:
State and municipal securities		8,753		122		1,101		65		9,854		187
Total	$	17,768	$	174	$	2,076	$	92	$	19,844	$	266

	Less than 12 Months				12 Months or More				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
December 31, 2011	(In Thousands)
SECURITIES AVAILABLEFOR SALE:
Corporate securities	$	1,772	$	217	$	—	$	—	$	1,772	$	217
Mortgage-backed securities		6,698		15		—		—		6,698		15
		8,470		232		—		—		8,470		232
SECURITIES HELDTO MATURITY:
State and municipal securities		1,045		19		3,185		396		4,230		415
Total	$	9,515	$	251	$	3,185	$	396	$	12,700	$	647

At December 31, 2012, ten mortgage-backed securities have unrealized losses. The aggregate depreciation from the Corporation’s amortized cost basis on these securities is 0.6%. 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 December 31, 2012, twenty-seven state and municipal securities have unrealized losses with aggregate depreciation of 1.9% from the Corporation’s amortized cost basis. In management’s

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NOTE 3 - SECURITIES (CONTINUED)

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.

At December 31, 2012, two corporate securities have unrealized losses with aggregate depreciation of 2.7% 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 company.

In management’s opinion none of the debt securities have declines in value that are deemed to be other than temporary.

Gross realized gains and losses for the years ending December 31, 2012 and December 31, 2011 were as follows (in thousands):

	Gross Realized Gains		Gross Realized Losses		Net Gains (Losses)
December 31, 2012:
Mortgage-backed securities	$	166	$	—	$	166
	$	166	$	—	$	166
December 31, 2011:
Equity securities	$	8	$	—	$	8
Mortgage-backed securities		4	$	—		4
	$	12	$	—	$	12

Amortized cost and fair value at December 31, 2012 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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NOTE 3 - SECURITIES (CONTINUED)

	Available for Sale				Held to Maturity
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(In Thousands)
1 year or less	$	833	$	843	$	3,362	$	3,398
Over 1 year through 5 years		3,772		3,881		15,349		16,062
Over 5 years through 10 years		1,002		975		23,282		24,696
Over 10 years		—		—		8,655		9,330
Mortgage-backed securities		78,090		79,666		—		—
Equity securities		640		1,071		—		—
	$	84,337	$	86,436	$	50,648	$	53,486

At December 31, 2012 and 2011, securities with a carrying value of $54,861,000 and $36,653,000, respectively, were pledged as collateral as required by law on public deposits and for other purposes.

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NOTE 4 - LOANS

Allowance for loan losses at December 31, 2012 and December 31, 2011 and loans receivable at December 31, 2012 and December 31, 2011 are as follows:

Allowance for Loan Losses:

		Commercial			Commercial Real Estate			Agricultural		Consumer			Residential Real  Estate			Total
		(in Thousands)
December 31, 2011 Total Allowance for loan losses		$	808		$	1,082		$	382	$	86		$	727		$	3,085
Provision			181			15			12		19			97			324
Charge-offs			(35	)		(530	)		—		(24	)		(87	)		(676	)
Recoveries			—			55			—		6			—			61
December 31, 2012 Total Allowance for loan losses	��	$	954		$	622		$	394	$	87		$	737		$	2,794
Ending balance for loans individually evaluated for impairment		$	176		$	154		$	—	$	—		$	22		$	352
Ending balance for loans collectively evaluated for impairment		$	778		$	468		$	394	$	87		$	715		$	2,442

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NOTE 4 - LOANS (CONTINUED)

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		96			452		398			(5	)		41			982
Charge-offs		(18	)		—		(27	)		(4	)		(24	)		(73	)
Recoveries		—			—		11			3			8			22
December 31, 2011 Total Allowance for loan losses	$	808		$	1,082	$	382		$	86		$	727		$	3,085
Ending balance for loans individually evaluated for impairment	$	296		$	670	$	—		$	—		$	—		$	966
Ending balance for loans collectively evaluated for impairment	$	512		$	412	$	382		$	86		$	727		$	2,119

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NOTE 4 - LOANS (CONTINUED)

Loans Receivable:

December 31, 2012	Commercial		Commercial Real Estate		Agricultural		Consumer		Residential		Total
	(in Thousands)
Individually evaluated for impairment	$	286	$	5,685	$	406	$	—	$	709	$	7,086
Collectively evaluated for impairment		47,414		36,390		34,699		6,315		114,040		238,858
Total loans	$	47,700	$	42,075	$	35,105	$	6,315	$	114,749	$	245,944

December 31, 2011	Commercial		Commercial Real Estate		Agricultural		Consumer		Residential		Total
	(in Thousands)
Individually evaluated for impairment	$	296	$	4,477	$	469	$	—	$	—	$	5,242
Collectively evaluated for impairment		45,956		39,234	$	37,191		6,036		117,353		245,770
Total loans	$	46,252	$	43,711	$	37,660	$	6,036	$	117,353	$	251,012

Analysis of credit quality indicators is as follows:

December 31, 2012	Commercial		Commercial Real Estate		Agricultural		Consumer		Residential		Total
	(in Thousands)
Pass	$	44,933	$	40,317	$	29,011	$	6,279	$	112,698	$	233,238
Special Mention		2,345		57		4,075		—		—		6,477
Substandard		325		1,701		2,019		36		2,051		6,132
Doubtful		97		—		—		—		—		97
Loss		—		—		—		—		—		—
Total	$	47,700	$	42,075	$	35,105	$	6,315	$	114,749	$	245,944

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NOTE 4 - LOANS (CONTINUED)

December 31, 2011	Commercial		Commercial Real Estate		Agricultural		Consumer		Residential		Total
	(in Thousands)
Pass	$	45,330	$	41,008	$	34,865	$	6,023	$	115,838	$	243,064
Special Mention		553		780		2,326		11		509		4,179
Substandard		73		1,285		469		2		1,006		2,835
Doubtful		296		638		—		—		—		934
Loss		—		—		—		—		—		—
Total loans	$	46,252	$	43,711	$	37,660	$	6,036	$	117,353	$	251,012

The following is a summary of impaired loans:

December 31, 2012	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
	(In Thousands)
With no specific allowance needed
Commercial	$	—	$	—	$	—	$	—	$	—
Commercial real estate		4,459		4,459		—		4,427		219
Agricultural		406		406		—		444		33
Residential		506		506		—		608		23
With an allowance recorded
Commercial		286		286		176		453		11
Commercial real estate		1,226		1,226		154		1,257		58
Residential		203		203		22		202		7
Total
Commercial		286		286		176		453		11
Commercial real estate		5,685		5,685		154		5,684		277
Agricultural		406		406		—		444		33
Residential		709		709		22		810		30
Total	$	7,086	$	7,086	$	352	$	7,391	$	351

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NOTE 4 - LOANS (CONTINUED)

December 31, 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		469		469		—		472		31
With an allowance recorded
Commercial		296		296		296		267		11
Commercial real estate		4,477		4,477		670		4,492		212
Total
Commercial		296		296		296		267		11
Commercial real estate		4,477		4,477		670		4,492		212
Agricultural		469		469		—		472		31
Total	$	5,242	$	5,242	$	966	$	5,231	$	254

Age analysis of past-due loans is as follows:

December 31, 2012	30 – 59 Days Past Due		60 – 89 Days Past Due		>90 Days Past Due		Total Past Due		Current		Total Loans		Allowance For Collectively Impaired Loans		>90 Days And Still Accruing		Nonaccruals
	(In Thousands)
Commercial	$	—	$	—	$	—	$	—	$	47,700	$	47,700	$	—	$	—	$	283
Commercial Real Estate		—		—		—		—		42,075		42,075		0		—		3,029
Agricultural		216		33		—		249		34,856		35,105		0		—		406
Residential		402		47		891		1,340		113,409		114,749		0		—		1,370
Consumer		54		23		4		81		6,234		6,315		0		—		26
Total	$	672	$	103	$	895	$	1,670	$	244,274	$	245,944	$	0	$	—	$	5,114

30

FIRST COMMUNITY FINANCIAL CORPORATION

NOTESTO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 4 - LOANS (CONTINUED)

December 31, 2011	30 – 59 Days Past Due		60 – 89 Days Past Due		> 90 Days Past Due		Total Past Due		Current		Total Loans		Allowance For Collectively Impaired Loans		>90 Days And Still Accruing		Nonaccruals
	(In Thousands)
Commercial	$	121	$	230	$	7	$	358	$	45,894	$	46,252	$	—	$	—	$	7
Commercial Real Estate		133		130		34		297		43,414		43,711		—		—		100
Agricultural		177		—		—		177		37,483		37,660		—		—		—
Residential		831		249		101		1,181		116,172		117,353		—		—		528
Consumer		58		7		1		66		5,970		6,036		—		—		9
Total	$	1,320	$	616	$	143	$	2,079	$	248,933	$	251,012	$	—	$	—	$	644

The following is a summary of Troubled Debt Restructurings (in thousands):

	Twelve Months Ended December 31, 2012						Twelve Months Ended December 31, 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		8	$	6,244	$	6,244		2	$	4,484	$	4,484
Troubled Debt Restructurings that Subsequently Defaulted		—		—		—		—		—		—

No additional funds are committed to be advanced in connection with any loans whose terms have been modified in troubled debt restructurings.

The Corporation, in the ordinary course of business, has loan, deposit and other routine transactions with its officers, directors and principal shareholders and entities in which they have principal ownership. Loans are made to such customers at the same credit terms as other borrowers and do not represent more than the usual risk of collection. Changes during 2012 and 2011 in these related party loans were as follows (in thousands):

	2012			2011
	(In Thousands)
Balance, beginning	$	670		$	788
Advances		576			468
Repayments		(347	)		(586	)
Balance, ending	$	899		$	670

31

FIRST COMMUNITY FINANCIAL CORPORATION

NOTESTO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5 - PREMISESAND EQUIPMENT

Premises and equipment at December 31 were as follows:

	Range of Useful Lives	2012			2011
	(in years)	(In Thousands)
Land	-	$	1,250		$	1,250
Buildings and improvements	7 - 39		9,474			8,992
Furniture, equipment and software	3 - 20		5,669			4,957
			16,393			15,199
Accumulated depreciation			(8,277	)		(7,738	)
Premises and equipment, net		$	8,116		$	7,461

NOTE 6 - DEPOSITS

Deposits were comprised of the following as of December 31:

	2012		2011
	(In Thousands)
Non-interest bearing demand	$	40,348	$	35,994
Interest bearing demand		44,813		27,620
Savings		120,842		111,515
Time deposits less than $100,000		100,443		99,011
Time deposits greater than $100,000		58,682		56,409
Total	$	365,128	$	330,549

Scheduled maturities of time deposits at December 31, 2012 were as follows (in thousands):

2013	$	57,166
2014		21,233
2015		36,400
2016		28,075
2017		16,251
Total	$	159,125

The following table sets forth maturity information on time deposits of $100,000 or more as of December 31, 2012 (in thousands):

Three months or less	$	6,954
Over three and through six months		4,408
Over six and through twelve months		5,136
Over twelve months		42,184
Total	$	58,682

32

FIRST COMMUNITY FINANCIAL CORPORATION

NOTESTO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6 -DEPOSITS (CONTINUED)

Total aggregate deposits of employees, officers, directors and related interests on December 31, 2012 was $7,553,000.

NOTE 7 - BORROWINGS

Short-term borrowings at December 31 were as follows:

	2012			2011
	(In Thousands)
Amount outstanding at end of year:
Securities sold under agreements to repurchase	$	2,410		$	2,685
Federal funds purchased		—			—
Federal Home Loan Bank		—			—
Treasury tax and loan note		—			—
Total	$	2,410		$	2,685
Weighted average interest rate at end of year		1.31	%		1.33	%
Maximum amount outstanding at any end of month	$	3,064		$	5,194
Daily average amount outstanding		2,861			3,215
Approximate weighted average interest rate for the year		1.29	%		1.21	%

Securities sold under agreements to repurchase generally mature within one day from the transaction date. At December 31, 2012, securities with a carrying amount of $5,157,000 and a fair value of $5,169,000 were pledged as collateral for these agreements. At December 31, 2011, securities with a carrying amount of $3,951,000 and a fair value of $3,965,000 were pledged as collateral for these agreements. As of December 31, 2012, the interest rate on securities sold under agreements to repurchase was 1.31%. The securities underlying the agreements were under the Corporation’s control.

Long-term borrowings at December 31 were as follows:

	2012		2011
	(In Thousands)
Convertible advances:
Maturing in 2013 with an initial fixed rate of 3.11%	$	—	$	5,000
Maturing in 2017 with initial fixed rates ranging from 4.30% to 4.60%, with a weighted average rate of 4.45% at December 31, 2012 and 2011.		10,000		10,000
Total	$	10,000	$	15,000

Convertible advances allow the FHLB the periodic option to convert to a LIBOR adjustable-rate advance after the specified fixed rate period has elapsed. At December 31, 2012, the FHLB has the option to convert advances to rates that range from three month LIBOR plus 0.07% to 0.13%, of which $10 million is eligible for the conversion option, but not exercised by the FHLB, at December 31, 2012. Upon the FHLB’s conversion option being exercised, the Bank has the option to repay the respective advance in full, without penalty.

33

FIRST COMMUNITY FINANCIAL CORPORATION

NOTESTO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 7 - BORROWINGS (CONTINUED)

The Corporation has a maximum borrowing capacity through the Federal Home Loan Bank of approximately $149,528,000, of which $139,528,000 was available at December 31, 2012. The borrowing capacity is collateralized by security agreements in certain residential real estate backed assets of the Corporation, including loans and investments.

The Corporation has issued $5,155,000 of floating rate junior subordinated deferrable interest debentures to a non-consolidated subsidiary trust, First Community Financial Capital Trust I (the Trust). The Corporation owns all of the common equity of the Trust. The debentures held by the trust are the sole assets of the trust.

The Trust issued $5,000,000 of mandatorily redeemable preferred securities to third-party investors. The Corporation’s obligations under the debentures and related documents, taken together, constitute a full and unconditional guarantee by the Corporation of the Trust’s obligations under the preferred securities. The junior subordinated debt securities pay interest quarterly at 3-month LIBOR plus 3.00% (3.34% at December 31, 2012). Pursuant to the debenture agreement, the Corporation can elect to defer payments of interest for up to 20 consecutive quarterly periods, provided there is no event of default as defined in the indenture. The Corporation has not deferred any quarterly interest payments through December 31, 2012. The preferred securities are redeemable quarterly by the Corporation at 100% of principal plus accrued interest on or after January 7, 2009. The preferred securities must be redeemed upon maturity of the debentures on January 7, 2034. The terms of the junior subordinated deferrable interest debentures match those of the preferred securities.

NOTE 8 - OPERATING LEASES

The Corporation leases its Delaware office (Juniata County), Shermans Dale office, the loan production office in Lewistown and the land on which its East Waterford office was constructed. The Corporation has an option through 2014 to purchase the land, for a predetermined price of $125,000. The Corporation also receives rental income for leasing of available space at its West Perry and Loysville offices. Net lease expense was $29,000 in 2012 and $12,000 in 2011 after deducting rental expense of $78,000 and $64,000, respectively.

The following table represents the Corporation’s contractual lease obligations to make future payments as of December 31, 2012 (in thousands):

	Less than 1 Year		1 - 3 Years		4 - 5 Years		Over 5 Years		Total
Total Operating Leases	$	74	$	26	$	—	$	—	$	100

34

FIRST COMMUNITY FINANCIAL CORPORATION

NOTESTO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 9 - INCOME TAXES

The components of income tax expense for the years ended December 31, 2012 and 2011 are as follows:

	2012			2011
	(In Thousands)
Federal:
Current	$	1,311		$	1,317
Deferred		(151	)		(222	)
Total	$	1,160		$	1,095

Reconciliations of the statutory federal income tax at a rate of 34% to the income tax expense reported in the consolidated statements of income for the years ended December 31, 2012 and 2011 are as follows:

	Percentage of Income before Income Taxes
	2012			2011
Federal income tax at statutory rate		34.0	%		34.0	%
Tax-exempt income		(12.0	)		(11.6	)
Earnings on investment in life insurance		(1.6	)		(1.5	)
Total		20.4	%		20.9	%

Components of deferred tax assets and liabilities at December 31 were as follows:

	2012			2011
	(In Thousands)
Deferred tax assets:
Allowance for loan losses	$	897		$	1,023
Nonaccrual loans interest		21			4
Intangible assets		2			5
Retirement liabilities		598			576
State net operating loss carryforward		229			212
Gross deferred tax asset		1,747			1,820
Valuation allowance		(229	)		(212	)
		1,518			1,608
Deferred tax liabilities:
Accumulated depreciation		275			280
Available for sale securities		739			716
Other		197			131
		1,211			1,127
Net Deferred Tax Assets	$	307		$	481

35

FIRST COMMUNITY FINANCIAL CORPORATION

NOTESTO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 9 - INCOME TAXES (CONTINUED)

The Corporation accounts for Income Taxes in accordance with income tax accounting guidance (FASB ASC 740,Income Taxes). The Corporation follows accounting guidance related to accounting for uncertainty in income taxes, which sets out a consistent framework to determine the appropriate level of tax reserves to maintain for uncertain tax positions.

The income tax accounting guidance results in two components of income tax expense: current and deferred. Current income tax expense reflects taxes to be paid or refunded for the current period by applying the provisions of the enacted tax law to the taxable income or excess of deductions over revenue. The Corporation determines deferred income taxes using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax bases of assets and liabilities, and enacted changes in tax rates and laws are recognized in the period in which they occur.

Deferred income tax expense results from changes in deferred tax assets and liabilities between periods. Deferred tax assets are reduced by a valuation allowance if, based on the weight of evidence available, it is more likely than not that some portion or all of a deferred tax asset will not be realized.

As of December 31, 2012, the Corporation has State net operating loss carryforwards of $2,297,000 that expire through the year 2032. Management does not believe that these net operating loss carryforwards will be utilized prior to their expiration, as they were incurred by the holding company with little revenue opportunities to offset the losses, and as such, a valuation allowance has been provided for them.

Uncertain tax positions are recognized if it is more likely than not, based on the technical merits, that the tax position will be sustained upon examination. The term “more likely than not” means a likelihood of more than 50 percent; the terms examined and upon examination also include resolution of the related appeals of litigation processes, if any. A tax position that meets the more-likely-than-not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that has a greater than 50 percent likelihood of being sustained upon settlement with a taxing authority that has full knowledge of all relevant information. The determination of whether or not a tax position has met the more-likely-than-not recognition threshold considers the facts, circumstances, and information available at the reporting date and is subject to management’s judgment.

The Corporation recognizes interest and penalties on income taxes as a component of income tax expense. Tax years subject to examination by tax authorities are the years ended December 31, 2011, 2010 and 2009.

NOTE 10 - RETIREMENT PLANS

The Corporation maintains a 401(k) plan for the benefit of eligible employees. Employer contributions include matching a portion of employee contributions and a discretionary contribution determined by the Corporation. Corporation contributions to the Plan were $197,000 and $187,000 for 2012 and 2011.

The Corporation maintains non-qualified compensation plans for selected employees (supplemental retirement) and directors (deferred fees). The estimated present value of future benefits is accrued over the period from the effective date of the agreements until the expected retirement dates of the individuals. Expenses include the following amounts for these non-qualified plans:

	2012		2011
	(In Thousands)
Employee compensation	$	19	$	80
Director compensation		85		76

36

FIRST COMMUNITY FINANCIAL CORPORATION

NOTESTO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 10 -RETIREMENTPLANS (CONTINUED)

The balance accrued for these plans included in other liabilities as of December 31, 2012 and 2011 totaled $1,760,000 and $1,694,000.

To fund the benefits under these plans, the Corporation is the owner of single premium life insurance policies on participants in the non-qualified retirement plans. At December 31, 2012 and 2011, the cash value of these policies was $8,250,000 and $7,399,000.

NOTE 11 - REGULATORY MATTERSAND SHAREHOLDERS’ EQUITY

The Corporation and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet the minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Corporation’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Corporation and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Corporation and the Bank to maintain minimum amounts and ratios (set forth below) of Tier 1 capital to average assets and of Tier 1 and total capital (as defined in the regulations) to risk weighted assets. Management believes, as of December 31, 2012, that the Corporation and the Bank meet all capital adequacy requirements to which they are subject.

As of December 31, 2012, the most recent notification from the regulators categorized the Bank as “well capitalized” under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the Bank’s category.

37

FIRST COMMUNITY FINANCIAL CORPORATION

NOTESTO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 11 - REGULATORY MATTERSAND SHAREHOLDERS’ EQUITY (CONTINUED)

The actual and required capital amounts and ratios were as follows:

Actual

For Capital Adequacy Purposes

To be Well Capitalized under Prompt Corrective Action Provisions

Amount

Ratio

Amount

Ratio

Amount

Ratio

(Dollars in Thousands)

CORPORATION:

As of December 31, 2012:

Tier 1 leverage ratio (to average assets)

$

38,393

9.1

%

$

³16,967

³4.0

%

N/A

N/A

Tier 1 risk-based capital ratio (to risk-weighted assets)

38,393

18.0

³8,527

³4.0

N/A

N/A

Total risk-based capital ratio (to risk-weighted assets)

41,255

19.4

³17,054

³8.0

N/A

N/A

As of December 31, 2011:

Tier 1 leverage ratio (to average assets)

$

35,086

9.1

%

$

³15,349

³4.0

%

N/A

N/A

Tier 1 risk-based capital ratio (to risk-weighted assets)

35,086

16.8

³8,332

³4.0

N/A

N/A

Total risk-based capital ratio (to risk-weighted assets)

37,884

18.2

³16,663

³8.0

N/A

N/A

BANK:

As of December 31, 2012:

Tier 1 leverage ratio (to average assets)

$

37,734

8.8

%

$

³16,951

³4.0

%

$

³21,189

³5.0

%

Tier 1 risk-based capital ratio (to risk-weighted assets)

37,734

17.6

³8,500

³4.0

³12,749

³6.0

Total risk-based capital ratio (to risk-weighted assets)

40,034

18.8

³16,999

³8.0

³21,249

³10.0

As of December 31, 2011:

Tier 1 leverage ratio (to average assets)

$

34,329

9.0

%

$

³15,325

³4.0

%

$

³19,157

³5.0

%

Tier 1 risk-based capital ratio (to risk-weighted assets)

34,329

16.5

³8,304

³4.0

³12,455

³6.0

Total risk-based capital ratio (to risk-weighted assets)

36,932

17.8

³16,607

³8.0

³20,759

³10.0

Certain restrictions exist regarding the ability of the Bank to transfer funds to the Corporation in the form of cash dividends, loans or advances. Regulatory approval is required if the total of all dividends declared by a national bank in any calendar year exceeds net profits (as defined) for that year combined with the retained net profits for the two preceding calendar years. At December 31, 2012, approximately $9,153,000 of undistributed earnings of the Bank, included in consolidated shareholders’ equity, was available for distribution to the Corporation as dividends without prior regulatory approval.

In 2008 the Corporation implemented a dividend reinvestment and stock purchase plan. This plan was discontinued in December 2012. Prior to the plan’s discontinuance holders of common stock may participate in the plan in which reinvested dividends and voluntary cash payments may be invested in additional common shares. The Corporation had reserved 100,000 shares to be issued under this plan, of which 16,018 common shares were issued pursuant to this plan.

38

FIRST COMMUNITY FINANCIAL CORPORATION

NOTESTO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 11 - REGULATORY MATTERSAND SHAREHOLDERS’ EQUITY (CONTINUED)

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. As of December 31, 2012, the Corporation has purchased 3,656 shares under this repurchase program.

NOTE 12 - FINANCIAL INSTRUMENTSWITH OFF BALANCE SHEET RISK

The Corporation is a party to financial instruments with off balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments consist primarily of commitments to extend credit (typically mortgages and commercial loans) and, to a lesser extent, standby letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized on the balance sheet. The Corporation’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Corporation uses the same credit policies in making commitments and conditional obligations as it does for on balance sheet instruments. The Corporation does not anticipate any material losses from these commitments.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Corporation evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Corporation upon extensions of credit, is based on management’s credit evaluation of the customer. Collateral held varies but may include accounts receivable, inventory, property and equipment and income-producing commercial properties. On loans secured by real estate, the Corporation generally requires loan to value ratios of no greater than 80%.

Standby letters of credit are conditional commitments issued by the Corporation to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements and similar transactions. The terms of the letters of credit vary and may have renewal features. The credit risk involved in using letters of credit is essentially the same as that involved in extending loans to customers. The Corporation holds collateral supporting those commitments for which collateral is deemed necessary. Management believes that the proceeds obtained through a liquidation of such collateral would be sufficient to cover the maximum potential amount of future payments required under the corresponding guarantees. The current amount of the liability as of December 31, 2012 and 2011 for guarantees under standby letters of credit issued is not material.

The Corporation has not been required to perform on any financial guarantees, and has not incurred any losses on its commitments, during the past two years.

A summary of the Corporation’s commitments at December 31 were as follows:

	2012		2011
	(In Thousands)
Commitments to extend credit	$	37,702	$	33,309
Standby letters of credit	$	241	$	110

39

FIRST COMMUNITY FINANCIAL CORPORATION

NOTESTO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 13 - FAIR VALUEOF 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.

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).

40

FIRST COMMUNITY FINANCIAL CORPORATION

NOTESTO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 13 - FAIR VALUEOF FINANCIAL INSTRUMENTS (CONTINUED)

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).

For financial assets measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy used at December 31, 2012 and 2011 are as follows (in thousands):

Description	December 31, 2012		(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	$	3,731	$	—	$	3,731	$	—
Mortgage-backed securities		79,666		—		79,666		—
Corporate securities		1,968		—		1,968		—
Equity securities		1,071		476		—		595
Securities available for sale	$	86,436	$	476	$	85,365	$	595

41

FIRST COMMUNITY FINANCIAL CORPORATION

NOTESTO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 13 - FAIR VALUEOF FINANCIAL INSTRUMENTS (CONTINUED)

Description	December 31, 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	$	5,665	$	—	$	5,665	$	—
Mortgage-backed securities		65,312		—		65,312		—
Corporate securities		1,772				1,772
Equity securities		1,055		460		—		595
Securities available for sale	$	73,804	$	460	$	72,749	$	595

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 December 31, 2012 and December 31, 2011.

	2012		2011
Fair Value, beginning of year	$	595	$	589
Total gains (losses) included in other comprehensive income		—		6
Purchases		—		—
Fair Value, end of year	$	595	$	595

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.

42

FIRST COMMUNITY FINANCIAL CORPORATION

NOTESTO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 13 - FAIR VALUEOF FINANCIAL INSTRUMENTS (CONTINUED)

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.

Assets measured at fair value on a non-recurring basis at December 31, 2012 and 2011 are summarized below:

Description	December 31,     2012		(Level 1) Quoted Prices in Active     Markets for     Identical Assets		(Level 2) Significant Other      Observable     Inputs		(Level 3) Significant      Unobservable     Inputs
Impaired loans	$	6,734	$	0	$	0	$	6,734
Foreclosed real estate		212		0		0		212

Description	December 31,     2011		(Level 1) Quoted Prices in Active     Markets for     Identical Assets		(Level 2) Significant Other      Observable     Inputs		(Level 3) Significant      Unobservable     Inputs
Impaired loans	$	4,276	$	—	$	—	$	4,276
Foreclosed real estate		358		—		—		358

Total impaired loans, which are measured for impairment using the fair value of the collateral for collateral-dependent loans, had a carrying amount of $7,086,000 and $5,242,000, net of the valuation allowances of $352,000 and $966,000 as of December 30, 2012 and December 31, 2011, respectively. This resulted in additional provision for loan losses of $100,000 for the period ending December 31, 2012 and $803,000 for the period ending December 31, 2011.

The following table displays quantitative information about Level 3 Fair Value Measurements for December 31, 2012.

	Quantitative information about Level 3 fair value measurements for December 31, 2012
	Fair Value		Valuation Techniques	Unobservable Input
Securities available for sale	$	595	Last sale price	-
Impaired loans	$	6,734	Discounted cash flow Discounted appraised value	Constant prepayment rate, selling cost and discount for lack of marketability
Other real estate owned	$	212	Discounted appraised value	Selling cost and discount for lack of marketability

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.

43

FIRST COMMUNITY FINANCIAL CORPORATION

NOTESTO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 13 - FAIR VALUEOF FINANCIAL INSTRUMENTS (CONTINUED)

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 December 31, 2012 and December 31, 2011.

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.

44

FIRST COMMUNITY FINANCIAL CORPORATION

NOTESTO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 13 - FAIR VALUEOF FINANCIAL INSTRUMENTS (CONTINUED)

Short-term borrowings:

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

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.

45

FIRST COMMUNITY FINANCIAL CORPORATION

NOTESTO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 13 - FAIR VALUEOF FINANCIAL INSTRUMENTS (CONTINUED)

The estimated fair values of the Corporation’s financial instruments were as follows at December 31, 2012 and 2011.

	December 31, 2012
	Carrying Amount		Fair Value		Level 1		Level 2		Level 3
	(In Thousands)
Financial assets:
Cash and cash equivalents	$	17,789	$	17,789	$	17,789	$	—	$	—
Time certificates of deposit		198		198		198		—		—
Investment securities:
Available for sale		86,436		86,436		476		85,365		595
Held to maturity		50,648		53,486		—		53,486		—
Loans, net		242,935		245,243		—		—		245,243
Accrued interest receivable		1,576		1,576		—		1,576		—
Investment in life insurance		8,250		8,250		—		8,250		—
Restricted investment in bank stocks		1,794		1,794		—		1,794		—
Mortgage servicing rights		564		564		—		564		—
Total financial assets	$	410,190	$	415,336	$	18,463	$	151,035	$	245,838
Financial liabilities:
Deposits	$	365,128	$	370,471	$	—	$	370,471	$	—
Short-term borrowings		2,410		2,410		—		2,410		—
Long-term debt		10,000		11,560		—		11,560		—
Junior subordinated debt		5,155		5,155		—		—		5,155
Accrued interest payable		258		258		—		258		—
Total financial liabilities	$	382,951	$	389,854	$	—	$	384,699	$	5,155
Off-balance sheet financial instruments	$	—	$	—	$	—	$	—	$	—

46

FIRST COMMUNITY FINANCIAL CORPORATION

NOTESTO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 13 - FAIR VALUEOF FINANCIAL INSTRUMENTS (CONTINUED)

	2011
	Carrying Amount		Fair Value
Financial assets:
Cash and cash equivalents	$	9,938	$	9,938
Time certificates of deposit		198		198
Investment securities:
Available for sale		73,804		73,804
Held to maturity		34,972		36,639
Loans, less allowance for loan losses		247,703		250,707
Accrued interest receivable		1,417		1,417
Restricted investment in bank stocks		2,121		2,121
Total financial assets	$	370,153	$	374,824
Financial liabilities:
Deposits	$	330,549	$	335,041
Short-term borrowings		2,685		2,685
Long-term debt		15,000		16,799
Junior subordinated debt		5,155		5,155
Accrued interest payable		298		298
Total financial liabilities	$	353,687	$	359,978
Off-balance sheet financial instruments		—		—

NOTE 14 - CONTINGENCIES

The Corporation is subject to claims and lawsuits which arise primarily in the ordinary course of business. Based on information presently available and advice received from legal counsel representing the Corporation in connection with any such claims and lawsuits, it is the opinion of management that the disposition or ultimate determination of any such claims and lawsuits will not have a material adverse effect on the consolidated financial position, consolidated results of operations or liquidity of the Corporation.

47

FIRST COMMUNITY FINANCIAL CORPORATION

NOTESTO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 15 - CONDENSED FINANCIAL INFORMATIONFOR PARENT COMPANY ONLY

BALANCE SHEETS

	December 31,
	2012		2011
	(In Thousands)
ASSETS
Cash	$	402	$	128
Investment in bank subsidiary		38,531		35,431
Investment in unconsolidated subsidiary trust		155		155
Securities available for sale		1,071		1,055
Other assets		16		31
Total Assets	$	40,175	$	36,800
LIABILITIESAND SHAREHOLDERS’ EQUITY
Liabilities	$	212	$	207
Junior subordinated debt		5,155		5,155
Shareholders’ equity		34,808		31,438
Total Liabilities and Shareholders’ Equity	$	40,175	$	36,800

STATEMENTSOF INCOMEAND COMPREHENSIVE INCOME

	Years Ended December 31,
	2012		2011
	(In Thousands)
Dividends from bank subsidiary	$	1,631	$	1,055
Other dividends		51		42
Realized gains on sales of securities		—		8
		1,682		1,105
Expenses		216		206
		1,466		899
Equity in undistributed earnings in bank subsidiary		3,066		3,247
Net Income	$	4,532	$	4,146
Total Comprehensive Income	$	4,575	$	4,082

48

FIRST COMMUNITY FINANCIAL CORPORATION

NOTESTO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 15 - CONDENSED FINANCIAL INFORMATIONFOR PARENT COMPANY ONLY (CONTINUED)

STATEMENTSOF CASH FLOWS

	Years Ended December 31,
	2012			2011
	(In Thousands)
CASH FLOWSFROM OPERATING ACTIVITIES
Net income	$	4,532		$	4,146
Equity in undistributed earnings of bank subsidiary		(3,066	)		(3,247	)
Realized gains on sales of securities		—			(8	)
Decrease in other assets		15			15
Increase in other liabilities		5			2
Net Cash Provided by Operating Activities		1,486			908
CASH FLOWSFROM INVESTING ACTIVITIES
Purchase of securities available for sale		—			—
Proceed from sales of securities		—			29
Net Cash Available from Investing Activities		—			29
CASH FLOWSFROM FINANCING ACTIVITIES
Proceeds from issuance of common stock		177			128
Acquisition of treasury stock		—			—
Cash dividends paid		(1,382	)		(1,054	)
Net Cash Used in Financing Activities		(1,205	)		(926	)
Net Increase in Cash		274			11
CASH – BEGINNING		128			117
CASH – ENDING	$	402		$	128

49

FIRST COMMUNITY FINANCIAL CORPORATION

NOTESTO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 16 - QUARTERLY FINANCIAL DATA (UNAUDITED)

The following represents summarized unaudited quarterly financial data of the Corporation which in the opinion of management, reflects adjustments (comprising only normal recurring accruals) necessary for fair presentation:

	Three Months Ended
	December 31		September 30		June 30		March 31
	(In Thousands, Except per Share Amounts)
2012:
Interest income	$	4,417	$	4,549	$	4,504	$	4,551
Interest expense		1,324		1,366		1,394		1,391
Net interest income		3,093		3,183		3,110		3,160
Provision for loan losses		117		96		101		10
Provision for income taxes		225		284		345		306
Net income		1,037		1,136		1,224		1,135
Net income per share, basic		0.73		0.81		0.87		0.81
2011:
Interest income	$	4,657	$	4,651	$	4,547	$	4,536
Interest expense		1,383		1,393		1,505		1,533
Net interest income		3,274		3,258		3,042		3,003
Provision for loan losses		528		303		127		24
Provision for income taxes		234		290		319		252
Net income		974		1,090		1,092		990
Net income per share, basic		0.68		0.78		0.78		0.71

50

MANAGEMENT’S DISCUSSIONAND ANALYSISOF FINANCIAL

CONDITIONAND RESULTSOF OPERATIONS

The following discussion represents management’s analysis of the financial condition and results of operations of First Community Financial Corporation (the Corporation) and should be read in conjunction with the accompanying financial statements and other financial data included elsewhere in this report.

FORWARD-LOOKING STATEMENTS

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

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

51

EXECUTIVE SUMMARY

The Corporation’s results are primarily determined by the results of operations of its principal subsidiary, The First National Bank of Mifflintown (the Bank). The Bank is a traditional community bank which operates branches in two rural counties of central Pennsylvania. The Bank’s earnings are largely driven by its net interest income.

CRITICAL ACCOUNTING POLICIES

The consolidated financial statements include the Corporation and its wholly-owned subsidiaries, The First National Bank of Mifflintown and First Community Financial Capital Trust I. All significant intercompany accounts and transactions have been eliminated.

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 Note 1 to the financial statements). The Corporation believes that of its significant accounting policies, 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 earnings for 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 “Provision for Loan Losses” and “Allowance for Loan Losses” sections.

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. 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. For debt securities, management considers whether (1) it has the intent to sell the security and (2) it is more likely than not that it will be required to sell the security prior to its anticipated recovery.

OVERVIEW

In 2012, the Corporation recorded net income of $4,532,000, an increase of $386,000, or 9.3%, from net income of $4,146,000 in 2011.

The increase in net income during 2012 as compared to 2011 is primarily a result of the following:

• Increase in net interest income, after provision for loan losses, of $627,000; and

• Increase in total other income of $406,000;

These increases were partially offset by the following:

• Increase in total other expenses of $582,000; and

• Increase in provision for income taxes of $65,000.

Basic earnings per share were $3.22 in 2012 compared to $2.95 in 2011. Return on average equity for 2012 was 13.60% compared to 13.80% in 2011. Return on average assets was 1.10% for 2012 compared with 1.10% in 2011.

52

OVERVIEW (CONTINUED)

During 2012, the Corporation experienced a $4,768,000, or 1.9%, decrease in net loans, a $28,308,000 increase in securities and $34,579,000, or 10.5%, growth in deposits. These increases were offset by a $5,275,000, or 29.8 %, decrease in borrowings. As a result of these trends, total assets of the Corporation grew by $32,822,000, or 8.5%.

RESULTSOF OPERATIONS

NET INTEREST INCOMEAND NET INTEREST MARGIN

Net interest income is the difference between interest income earned on investments and loans, and interest expense incurred on deposits and other liabilities. For analysis purposes, net interest income is evaluated on a fully tax equivalent (FTE) basis. 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 factors that affect net interest income include changes in interest rates and changes in average balances of interest-earning assets and interest-bearing liabilities. Net interest income on an FTE basis increased to $13,662,000 in 2012 from $13,550,000 in 2011 and $12,165,000 in 2010.

53

NET INTEREST INCOMEAND NET INTEREST MARGIN (CONTINUED)

The following table includes average balances, rates and interest income and expense adjusted to an FTE basis, the interest rate spread and the net interest margin:

Average Balances, Rates and Interest Income and Expense

(Dollars in Thousands)

	2012							2011							2010
	Average Balance		Interest		Yield/ Rate			Average Balance		Interest		Yield/ Rate			Average Balance		Interest		Yield/ Rate
ASSETS
INTEREST EARNING ASSETS
Securities:
Taxable	$	80,508	$	1,940		2.41	%	$	71,675	$	2,237		3.12	%	$	75,843	$	2,481		3.27	%
Tax-exempt		41,964		2,376		5.66	%		32,928		2,095		6.36	%		29,392		1,953		6.64	%
Total Securities		122,472		4,316		3.52	%		104,603		4,332		4.14	%		105,235		4,434		4.21	%
Other		8,100		41		0.51	%		5,451		31		0.57	%		7,693		41		0.53	%
Loans:
Taxable		234,600		13,874		5.91	%		228,761		14,234		6.22	%		218,264		14,080		6.45	%
Tax-exempt		15,558		906		5.82	%		12,203		767		6.29	%		7,034		439		6.24	%
Total Loans		250,158		14,780		5.91	%		240,964		15,001		6.23	%		225,298		14,519		6.44	%
Total Interest Earning Assets		380,730		19,137		5.03	%		351,018		19,364		5.52	%		338,226		18,994		5.62	%
Non-interest earnings assets		30,477							26,837							25,416
Total Assets	$	411,207						$	377,855						$	363,642
LIABILITIESAND SHAREHOLDERS’ EQUITY
INTEREST BEARING LIABILITIES
Demand deposits, interest bearing	$	36,961	$	100		0.27	%	$	27,633	$	44		0.16	%	$	25,635	$	43		0.17	%
Savings deposits		118,709		855		0.72	%		105,308		941		0.89	%		85,904		878		1.02	%
Time deposits		160,598		3,682		2.29	%		156,126		3,997		2.56	%		166,458		4,907		2.95	%
Total Interest Bearing Deposits		316,268		4,637		1.47	%		289,067		4,982		1.72	%		277,997		5,828		2.10	%
Short-term borrowings		2,861		37		1.29	%		3,215		39		1.21	%		4,521		52		1.15	%
Long-term debt		19,950		801		4.02	%		20,377		793		3.89	%		23,248		949		4.08	%
Total Interest Bearing Liabilities		339,079		5,475		1.61	%		312,659		5,814		1.86	%		305,766		6,829		2.23	%
Demand deposits, non-interest bearing		35,895							32,252							28,341
Other liabilities		2,916							2,902							2,656
Shareholders’ equity		33,317							30,042							26,879
Total Liabilities and Shareholders’ Equity	$	411,207						$	377,855						$	363,642
NET INTEREST INCOME			$	13,662						$	13,550						$	12,165
INTEREST RATE SPREAD						3.41	%						3.66	%						3.38	%
NET INTEREST MARGIN						3.59	%						3.86	%						3.60	%

Yields on tax-exempt assets have been computed on a fully tax equivalent basis assuming a tax rate of 34%.

For yield calculation purposes, non-accruing loans are included in average loan balances.

Interest income on loans includes amortized fees and costs on loans totaling $(54,000) in 2012, $(29,000) in 2011, and $(43,000) in 2010.

Securities available for sale are carried at amortized cost for purposes of calculating the average yield on taxable securities.

54

NET INTEREST INCOMEAND NET INTEREST MARGIN (CONTINUED)

The following table shows changes in net interest income attributed to changes in rates and changes in average balances of interest-earning assets and interest-bearing liabilities:

Rate/Volume Analysis

(In Thousands)

	2012 versus 2011									2011 versus 2010
	Change Due to									Change Due to
	Rate			Volume			Total			Rate			Volume			Total
INTEREST EARNING ASSETS
Securities:
Taxable	$	(510	)	$	213		$	(297	)	$	(114	)	$	(130	)	$	(244	)
Tax-exempt		(231	)		512			281			(83	)		225			142
Other		7			3			10			(1	)		(9	)		(10	)
Total loans		(761	)		540			(221	)		(496	)		978			482
Total		(1,495	)		1,268			(227	)		(694	)		1,064			370
INTEREST BEARING LIABILITIES
Demand deposits, interest bearing		31			25			56			(2	)		3			1
Savings deposits		(183	)		97			(86	)		(110	)		173			63
Time deposits		(418	)		103			(315	)		(645	)		(265	)		(910	)
Short-term borrowings		3			(5	)		(2	)		3			(16	)		(13	)
Long-term debt		25			(17	)		8			(44	)		(112	)		(156	)
Total		(542	)		203			(339	)		(798	)		(217	)		(1,015	)
Net Interest Income	$	(953	)	$	1,065		$	112		$	104		$	1,281		$	1,385

Interest income is presented on a fully tax equivalent basis, assuming a tax rate of 34%.

The net change attributable to the combination of rate and volume has been allocated to the change due to volume.

2012 VERSUS 2011

During 2012, tax equivalent interest income increased by $227,000 as the result of an increase in earning assets offset by a decrease in the yield on earning assets of 0.49%. Average loans increased $9,194,000, increasing interest income by $540,000, and the yield on loans decreased 0.32%, reducing interest income by $761,000. The yield on securities decreased 0.62%, decreasing interest income by $741,000, but was offset by a change in volume and mix which increased income by $725,000.

Total average interest-bearing liabilities grew by $26,420,000 between 2012 and 2011, but the average rate paid on interest-bearing liabilities decreased 0.25%, decreasing interest expense by $339,000.

The net interest margin is the ratio of net interest income to interest-earning assets, reflecting a net yield on earning assets. The 0.27% decrease in net interest margin from 2011 to 2012 reflects the decrease in rates on interest-bearing liabilities was out-paced by the decrease in rates on interest-earning assets.

2011 VERSUS 2010

During 2011, tax equivalent interest income increased by $370,000 as the result of an increase in earning assets offset by a decrease in the yield on earning assets of 0.10%. Average loans increased $15,666,000, increasing interest income by $978,000, and the yield on loans decreased 0.21%, reducing interest income by $496,000. The yield on securities decreased 0.07%, decreasing interest income by $197,000, but was offset by a change in volume and mix which increased income by $95,000.

55

NET INTEREST INCOMEAND NET INTEREST MARGIN (CONTINUED)

Total average interest-bearing liabilities grew by $6,893,000 between 2011 and 2010, but the average rate paid on interest-bearing liabilities decreased 0.37%, decreasing interest expense by $1,015,000.

The net interest margin is the ratio of net interest income to interest-earning assets, reflecting a net yield on earning assets. The 0.26% increase in net interest margin from 2010 to 2011 reflects the decrease in rates on interest-bearing liabilities out-pacing the decrease in rates on interest-earning assets.

PROVISIONFOR LOAN LOSSES

The provision for loan losses and allowance for loan losses are based on management’s ongoing assessment of the Corporation’s credit exposure and consideration of other relevant factors. The allowance for loan losses is a valuation reserve, which is available to absorb future loan charge-offs. The provision for loan losses is the amount charged to earnings on an annual basis.

The Corporation recorded a $324,000 provision for loan losses in 2012 compared to $982,000 in 2011. Provisions for loan losses are charged to income to bring the allowance for loan losses to a level deemed appropriate by management based on the factors discussed under the “Allowance for Loan Losses” section. Based on that analysis, the level of the allowance for loan losses is considered by management to be appropriate at this time.

OTHER INCOME

2012 VERSUS 2011

Other income of $3,359,000 during 2012 increased by $406,000, or 13.7%, compared to 2011, primarily as a result of the following:

• A decrease in income from fiduciary activities of $27,000.

• An increase in investment securities gains of $154,000.

• A decrease in earnings on investment in life insurance of $39,000.

• An increase in other income of $244,000.

OTHER EXPENSES

2012 VERSUS 2011

Other expenses increased $582,000, or 6.3%, to $9,889,000 during 2012 compared to $9,307,000 during 2011, primarily as a result of the following:

• An increase in employee compensation and benefits of $445,000 as the result of increases in the number of staff and merit increases during the year.

• An increase in net occupancy and equipment expense of $133,000.

• An increase in other operating expenses of $43,000.

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OTHER EXPENSES (CONTINUED)

INCOME TAXES

Income tax expense was $1,160,000 for 2012 compared to $1,095,000 for 2011 and $1,053,000 for 2010. Income tax expense as a percentage of income before income taxes was 20.4% for 2012 and 20.9% for 2011. The actual effective rate deviates from the 34% statutory rate due to tax exempt interest income and income earned on cash surrender value of life insurance. The Corporation’s lower effective tax rate in 2012 was a result of an increase in the percentage of pre-tax income being derived from tax-exempt investments and loans and tax-exempt income earned on life insurance. Refer to Note 9 to the consolidated financial statements for further analysis of income taxes.

FINANCIAL CONDITION

SECURITIES

The securities portfolio is a component of interest-earning assets and is second in size only to the Corporation’s loan portfolio. Investment securities not only provide interest income, they provide a source of liquidity, diversify the earning asset portfolio and provide collateral for public funds and securities sold under agreements to repurchase.

The Corporation’s securities are classified as either held to maturity or available for sale. Securities in the held to maturity category are accounted for at amortized cost. Available for sale securities are accounted for at fair value with unrealized gains and losses, net of taxes, reported as a separate component of comprehensive income.

The Corporation generally intends to hold its investment portfolio until maturity; however, about 63.1%, or $86,436,000, of total securities at December 31, 2012 was classified as available for sale. Net unrealized gains at year-end 2012 were $2,099,000 compared to $2,032,000 at year-end 2011. The net unrealized gain at December 31, 2012 is reflected as accumulated other comprehensive income of $1,359,000 in shareholders’ equity, net of deferred income taxes, compared to $1,316,000 at December 31, 2011. This increase reflects changes in interest rates and volume during 2012. 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. For debt securities, management considers whether (1) it has the intent to sell the security and (2) it is more likely than not that it will be required to sell the security prior to its anticipated recovery. For additional information on unrealized losses by investment type, see Note 3 to the consolidated financial statements.

Held to maturity securities totaled $50,648,000 at December 31, 2012 compared to $34,972,000 a year ago. The increase was a result of new purchases exceeding maturities of state and municipal securities. This portion of the portfolio is comprised of state and municipal securities that provide tax-exempt interest income to the Corporation.

57

SECURITIES (CONTINUED)

The following tables set forth the composition of the securities portfolio and the securities maturity schedule, including weighted average yield, as of the dates indicated:

Investment Securities

(In Thousands)

	2012		2011		2010
AVAILABLEFOR SALE SECURITIESAT FAIR VALUE
U.S. Government agencies	$	3,731	$	5,665	$	9,918
Mortgage-backed securities		79,666		65,312		64,660
Corporate securities		1,968		1,772		—
Stock in other banks		1,071		1,055		1,049
Total		86,436		73,804		75,627
HELDTO MATURITY SECURITIESAT AMORTIZED COST
State and municipal		50,648		34,972		31,872
Total		50,648		34,972		31,872
Total	$	137,084	$	108,776	$	107,499

The scheduled maturities of the securities portfolio at December 31, 2012 is as follows:

Securities Maturity Schedule

(Dollars in Thousands)

	1 Year or Less					Over 1-5 Years					Over 5-10 Years					Over 10 Years or no Maturity					Total
	Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield
U.S. Government agencies	$	843		1.02	%	$	2,888		3.51	%	$	—		—	%	$	—		%		$	3,731		2.95	%
Corporate securities		—		—			993		1.16			975		2.45			—		—			1,968		1.80
State and municipal		3,362		4.49			15,349		5.26			23,282		4.74			8,655		7.09			50,648		5.28
Mortgage-backed securities		—		—			—		—			—		—			79,666		1.89			79,666		1.89
Equity securities		—		—			—		—			—		—			1,071		—			1,071		—
Total	$	4,205		3.79	%	$	19,230		4.79	%	$	24,257		4.62	%	$	89,392		2.37	%	$	137,084		3.15	%

Held to maturity securities are accounted for at amortized cost and available for sale securities are accounted for at fair value.

Weighted average yields are calculated on a fully tax equivalent basis assuming a tax rate of 34%.

58

LOANS

Loans at December 31 were as follows:

	2012			2011			2010			2009			2008
	(In Thousands)
Commercial, financial and agricultural	$	45,232		$	44,811		$	39,021		$	32,369		$	22,944
Real estate:
Commercial		48,785			47,362			46,090			37,842			41,227
Construction		2,605			3,554			2,464			5,057			5,730
Residential		144,379			150,248			145,950			139,055			138,209
Installment		4,943			5,037			5,071			5,339			6,159
Total		245,944			251,012			238,596			219,662			214,269
Allowance for loan losses		(2,794	)		(3,085	)		(2,154	)		(2,830	)		(1,633	)
Deferred loan fees and costs, net		(215	)		(224	)		(211	)		(232	)		(259	)
Net loans	$	242,935		$	247,703		$	236,231		$	216,600		$	212,377

The loan portfolio comprises the major portion of the Corporation’s earning assets. The decrease in loans of $5,068,000, or 2.0%, during 2012 was attributable to the following: Commercial, financial, and agricultural loans grew by $421,000, residential real estate decreased by $5,869,000, commercial real estate increased by $1,423,000, construction loans decreased by $949,000 and installment loans decreased by $94,000.

The following table sets forth information on the contractual maturities for commercial and construction loans as of the dates indicated:

Loan Maturities - Commercial and Construction Loans

(In Thousands)

	Less than 1 Year		1-5 Years		Over 5 Years		Total
Commercial, financial and agricultural	$	13,949	$	8,962	$	22,321	$	45,232
Real estate:
Commercial		4,542		4,695		39,548		48,785
Construction		1,956		26		623		2,605
Total		20,447		13,683		62,492		96,622
Loans with a fixed interest rate		10,553		11,536		18,368		40,457
Loans with a variable interest rate		9,894		2,147		44,124		56,165
Total	$	20,447	$	13,683		62,492		96,622

The Corporation has a significant concentration of residential and commercial mortgage loans collateralized by properties located in Juniata and Perry Counties of Pennsylvania and the surrounding area.

59

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 collectability cease to exist. Troubled debt restructurings result when an economic concession has been made to a borrower taking the form of a reduction or deferral of interest and/or principal. As of December 31, 2012, the Corporation had nine troubled debt restructurings totaling $5,509,000 of which $2,554,000 carries a USDA guarantee. Management will continue to monitor these credits and adjustments to the reserve may occur in the future. Potential problem loans include impaired loans which, as of December 31, 2012, totaled $7,086,000, including the above mentioned troubled debt restructurings. These impaired loans constitute the entire relationships with these ten customers. At this time, no losses in excess of the valuation allowance is anticipated. Foreclosed real estate is acquired through foreclosure or in lieu of foreclosure and is recorded at fair value 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)

	2012			2011			2010			2009			2008
Non-accrual loans	$	5,114		$	644		$	1,016		$	4,254		$	2,623
Total Non-Performing Loans		5,114			644			1,016			4,254			2,623
Foreclosed real estate		212			358			133			122			—
Total Non-Performing Assets	$	5,326		$	1,002		$	1,149		$	4,376		$	2,623
Troubled debt restructurings	$	5,509		$	4,477		$	1,312		$	2,305		$	—
Other impaired loans	$	1,577		$	765		$	297		$	348		$	635
Ratios:
Non-performing loans to total loans		2.08	%		.26	%		.43	%		1.96	%		1.24	%
Non-performing assets to total loans and foreclosed real estate		2.16	%		.40	%		.49	%		2.02	%		1.24	%
Non-performing loans to allowance for loan losses		183.04	%		20.88	%		47.17	%		150.32	%		160.62	%
Non-accrual loans:
Interest income that would have been recorded under original terms		318			53			13			143			91
Interest income recorded during the year		281			45			21			115			23

Total non-performing assets at year-end 2012 increased $4,324,000 primarily as a result of the increase in loans in non-accrual status offset by a decrease in foreclosed real estate. The increase in loans in non-accrual status is primarily the result of three commercial relationships totaling $3,362,000, of which $2,554,000 is guaranteed by the USDA.

60

NON-PERFORMINGASSETS (CONTINUED)

ALLOWANCEFOR LOAN LOSSES

The Bank has established a systematic methodology for the determination of the allowance for loan losses. The methodology is set forth in a formal policy and takes into consideration the need for an overall general valuation as well as specific allowances that are tied to individual loans.

In originating loans, the Bank recognizes that losses will be experienced and that the risk of loss will vary with, among other things, the type of loan being made, the creditworthiness of the borrower over the term of the loan, general economic conditions and, in the case of a secured loan, the quality of the collateral for the loan.

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 maintains an allowance for loan losses that it considers adequate based on the evaluation process that it performs on a quarterly basis. As part of this process, management considers it appropriate to maintain a portion of the allowance that is based on credit quality trends, loan volume, current economic trends and other uncertainties. This portion of the allowance for loan losses is reflected as the unallocated portion in the table below that indicates the distribution of the allowance.

The allowance for loan losses is based on estimates and ultimate losses may vary from current estimates. These estimates are reviewed periodically and, as adjustments become necessary, they are reported in earnings in the periods in which they become known.

61

ALLOWANCEFOR LOAN LOSSES (CONTINUED)

The following tables set forth information on the analysis of the allowance for loan losses and the allocation of the allowance for loan losses as of the dates indicated:

Analysis of Allowance for Loan Losses

(Dollars in Thousands)

	Years Ended December 31,
	2012			2011			2010			2009			2008
Beginning balance	$	3,085		$	2,154		$	2,830		$	1,633		$	1,249
Provision for loan losses		324			982			336			1,237			365
Loans charged off:
Commercial, financial and agricultural		35			45			1			7			—
Real estate		617			24			1,002			5			—
Installment		24			4			33			29			9
Total Charged-off		676			73			1,036			41			9
Recoveries:
Commercial, financial and agricultural		—			11			—			—			—
Real estate		55			8			18			—			24
Installment		6			3			6			1			4
Total Recoveries		61			22			24			1			28
Net charge-offs (recoveries)		615			51			1,012			40			(19	)
Ending balance	$	2,794		$	3,085		$	2,154		$	2,830		$	1,633
	Years Ended December 31,
	2012			2011			2010			2009			2008
Ratios:
Net charge-offs (recoveries) to average loans		0.25	%		0.02	%		0.45	%		0.02	%		(0.01	)%
Allowance for loan losses to total loans		1.14	%		1.23	%		0.90	%		1.29	%		0.76	%

Allocation of the Allowance for Loan Losses

(Dollars in Thousands)

	2012					2011					2010					2009					2008
	Amount		Percent of Loan Type to Total Loans			Amount		Percent of Loan Type to Total Loans			Amount		Percent of Loan Type to Total Loans			Amount		Percent of Loan Type to Total Loans			Amount		Percent of Loan Type to Total Loans
Commercial, financial and agricultural	$	1,038		18.39	%	$	966		17.85	%	$	730		16.35	%	$	575		14.74	%	$	403		10.71	%
Real estate:
Commercial		932		19.84			1,305		18.87			630		19.32			1,333		17.23			334		19.24
Construction		—		1.06			—		1.41			—		1.03			—		2.30			—		2.67
Residential		737		58.70			728		59.86			702		61.17			697		63.30			692		64.50
Installment		87		2.01			86		2.01			92		2.13			114		2.43			126		2.88
Unallocated		—		N/A			—		N/A			—		N/A			111		N/A			78		N/A
Total	$	2,794		100	%	$	3,085		100.00	%	$	2,154		100.00	%	$	2,830		100.00	%	$	1,633		100.00	%

62

ALLOWANCEFOR LOAN LOSSES (CONTINUED)

Management believes the allowance for loan losses at December 31, 2012 and 2011 is adequate to absorb losses inherent in the loan portfolio. Although management believes that it uses the best information available to make such determinations, future adjustments to the allowance for loan losses may be necessary, and the results of operations could be significantly and adversely affected if circumstances differ substantially from the assumptions used in making the determinations. Furthermore, while the Bank believes it has established its existing allowance for loan losses in accordance with accounting principles generally accepted in the United States of America, there can be no assurance that the Office of the Comptroller of the Currency or the Federal Reserve Board, in reviewing our loan portfolio, will not request us to increase our allowance for loan losses. In addition, because future events affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that the existing allowance for loan losses is adequate or that material increases will not be necessary should the quality of loans deteriorate as a result of factors discussed above. Any material increase in the allowance for loan losses may adversely affect the Bank’s financial condition and results of operations.

DEPOSITS

Management believes that the development and retention of deposits is the basis of sound growth and profitability. These deposits provide the primary source of funding for loans and investments. The Corporation’s continued expansion and business development within its market area fueled the growth in deposits. As of December 31, 2012, deposits totaled $365,128,000 up $34,579,000, or 10.5%, from year-end 2011. Demand deposits contributed most of the growth with $21,547,000. Savings deposits increased $9,327,000 and time deposits increased $3,705,000. The growth in deposits resulted primarily from continuing bank-wide promotions of its money market account.

BORROWINGS

Short-term borrowings at December 31 were as follows:

	2012			2011			2010
	(Dollars in Thousands)
Amount outstanding at end of year:
Federal funds purchased	$	—		$	—		$	—
Securities sold under agreements to repurchase		2,410			2,685			3,930
Short-term FHLB advances		—			—			—
Treasury tax and loan note		—			—			100
Total	$	2,410		$	2,685		$	4,030
Weighted average interest rate at end of year		1.31	%		1.33	%		1.17	%
Maximum amount outstanding at any end of month	$	3,064		$	5,194		$	4,455
Daily average amount outstanding		2,861			3,215			4,521
Approximate weighted average interest rate for the year		1.29	%		1.21	%		1.15	%

63

BORROWINGS (CONTINUED)

Long-term debt at December 31 was as follows:

	2012			2011			2010
	(Dollars in Thousands)
Amount outstanding at end of year:
FHLB advances	$	10,000		$	15,000		$	16,000
Junior subordinated debt		5,155			5,155			5,155
Total	$	15,155		$	20,155		$	21,155
Weighted average interest rate at end of year		4.06	%		3.85	%		3.92	%
Daily average amount outstanding		19,950			20,377			23,248
Approximate weighted average interest rate for the year		4.02	%		3.89	%		4.08	%

Additional information on borrowings is located in Note 7 to the consolidated financial statement.

OFF-BALANCE SHEET ARRANGEMENTS

The Corporation is party to financial instruments with off-balance sheet risk entered into in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and, to a lesser extent, standby letters of credit. At December 31, 2012, the Corporation had unfunded outstanding commitments to extend credit of $37.8 million and outstanding standby letters of credit of $241,000. Because these commitments generally have fixed expiration dates and many will expire without being drawn upon, the total commitment level does not necessarily represent future cash requirements. The current amount of liability as of December 31, 2012 and 2011 for guarantees under standby letters of credit is not material. Refer to Note 12 of the consolidated financial statements for a discussion of the nature, business purpose and importance of the Corporation’s off-balance sheet arrangements.

LIQUIDITYAND CAPITAL RESOURCES

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. Liquidity is essential to compensate for fluctuations in the balance sheet and provide funds for growth.

The primary sources of liquidity are the Corporation’s deposit base and a strong capital position. The stability of the deposits is reflected in a comparison of year-end balances to yearly averages. Deposits at year-end 2012 totaled $365,128,000 and averaged $352,163,000 for the year. Likewise, year-end 2011 deposits totaled $330,549,000 and averaged $321,319,000 for the year. Other sources of liquidity are available from investment securities maturing in one year or less, which totaled $4,205,000 at year-end 2012, and from investments in mortgage-backed securities, which supply income and principal cash flow streams on an ongoing basis. Mortgage-backed securities represented 57.9% of the total amortized cost of securities as of December 31, 2012. These sources are believed by management to provide the Corporation with adequate resources to meet its short-term liquidity requirements. Longer term liquidity needs may include selling securities available for sale, which had a fair value of $86,436,000 at December 31, 2012, selling loans or raising additional capital. In addition, the Corporation has established federal funds lines of credit at the Federal Home Loan Bank of Pittsburgh and the Atlantic Central Bankers Bank, which are reliable sources for short and long-term funds. The maximum borrowing capacity through the Federal Home Loan Bank was approximately $149,528,000 at December 31, 2012, of which $139,528,000, or 93.3%, was available.

64

LIQUIDITYAND CAPITAL RESOURCES (CONTINUED)

The Corporation’s average loan to deposit ratio for 2012 was 71.0% and ended the year at 66.5%, compared to an average of 75.0% in 2011 and 74.3% at the end of 2010.

The Corporation’s financial statements do not reflect various commitments that are made in the normal course of business, which may involve some liquidity risk. These commitments consist mainly of unfunded loans and letters of credit made under the same standards as on-balance sheet instruments. Commitments to extend credit, at December 31, 2012 totaled $37.7 million and standby letters of credit totaled $241,000.

The Corporation is not aware of any known trends or any known demands, commitments, events or uncertainties, which would result in the liquidity increasing or decreasing in a material way.

The greater the capital resources, the more likely the Corporation will be able to meet its cash obligations and unforeseen expenses. The Corporation’s strong capital position is related to the Corporation’s earnings stability. The dividend payout ratio was 30.4% in 2012, compared to 25.4% in 2011. Shareholders’ equity at the end of 2012 totaled $34,808,000, an increase of $3,370,000, or 10.7%, over year-end 2011. The increase was a result of net income, a decrease in the unrealized gain on securities available for sale, net of taxes of $43,000 and an increase in common stock and surplus of $177,000 as a result of our dividend reinvestment plan, partially offset by the dividend payout of $1,382,000. Likewise, shareholders’ equity at the end of 2011 totaled $31,438,000, an increase of $3,156,000, or 11.2%, over year-end 2010. The increase was a result of net income, a decrease in the unrealized gain on securities available for sale, net of taxes of $64,000, an increase in common stock and surplus of $128,000 as a result of our dividend reinvestment plan, partially offset by the dividend payout of $1,054,000.

The table in Note 11 to the financial statements sets forth the Corporation’s and Bank’s capital ratios as of December 31, 2012 and 2011. These ratios show that the Bank exceeded the federal regulatory minimum requirements for a “well capitalized bank” at such dates. The minimum regulatory requirements of a “well capitalized bank” for the leverage ratio, Tier 1 and total risk-based capital ratios are 5.00%, 6.00% and 10.00%, respectively.

The Corporation’s ability to meet its expenses and pay dividends to its shareholders is dependent on the cash dividends it receives from the Bank. Certain restrictions exist regarding the ability of the Bank to transfer funds to the Corporation in the form of cash dividends, loans or advances. Regulatory approval is required if the total of all dividends declared by a national bank in any calendar year exceeds net profits (as defined) for that year combined with the retained net profits for the two preceding calendar years. At December 31, 2012, approximately $9,153,000 of undistributed earnings of the Bank, included in consolidated shareholders’ equity, was available for distribution to the Corporation as dividends without prior regulatory approval.

The Corporation is not under any agreement with the regulatory authorities nor is it aware of any current recommendations by the regulatory authorities that, if implemented, would have a material effect on the Corporation’s capital, liquidity or its operations.

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. As of December 31, 2012, the Corporation has purchased 3,656 shares under this repurchase program.

INFLATION

The impact of inflation upon banks differs from the impact upon non-banks. The majority of assets and liabilities of a bank are monetary in nature and, therefore, change with movements in interest rates. The exact impact of inflation on the Corporation is difficult to measure. Inflation may cause operating expenses to increase at a rate not matched by increased earnings. Inflation may also affect the borrowing needs of consumers, thereby affecting growth of the Corporation’s assets. Inflation may also affect the general level of interest rates, which could have an effect on the Corporation’s profitability. However, as discussed previously, the Corporation strives to manage its interest sensitive assets and liabilities offsetting the effects of inflation.

65

Summary of Selected Financial Data

(Amounts in Thousands, Except Per Share Data)

	2012			2011			2010			2009			2008
Income Statement Data
Net interest income	$	12,546		$	12,577		$	11,352		$	9,721		$	9,004
Provision for loan losses		324			982			336			1,237			365
Gains on sales of securities		166			12			182			459			—
Other income		3,193			2,941			2,577			2,496			2,296
Other expenses		9,889			9,307			9,036			8,797			7,978
Income before Income Taxes		5,692			5,241			4,739			2,642			2,957
Income tax expense		1,160			1,095			1,053			416			621
Net Income	$	4,532		$	4,146			3,686			2,226		$	2,336
Balance Sheet Data (Period End)
Total assets	$	420,705		$	387,883		$	374,155		$	355,836			326,714
Loans, net		242,935			247,703			236,231			216,600			212,377
Investments:
Held to maturity		50,648			34,972			31,872			30,204			24,127
Available for sale		86,436			73,804			75,627			81,437			66,376
Deposits		365,128			330,549			317,849			296,459			262,606
Short-term borrowings		2,410			2,685			4,030			4,512			10,613
Long-term debt		15,155			20,155			21,155			27,155			27,155
Shareholders’ equity		34,808			31,438			28,282			25,358			23,413
Per Share Data
Basic earnings	$	3.22		$	2.95		$	2.63		$	1.59		$	1.67
Cash dividends declared		0.98			0.75			0.675			0.58			0.52
Book value		24.65			22.33			20.15			18.10			16.73
Weighted average common shares outstanding		1,409			1,405			1,402			1,399			1,400
Selected Ratios
Return on average assets		1.10	%		1.10	%		1.01	%		0.65	%		0.73	%
Return on average shareholders’ equity		13.60	%		13.80	%		13.71	%		9.06	%		10.52	%
Average equity to average assets		8.10	%		7.95	%		7.39	%		7.13	%		6.96	%
Allowance for loan losses to total loans at end of period		1.14	%		1.23	%		0.90	%		1.29	%		0.76	%
Dividend payout ratio		30.43	%		25.42	%		25.66	%		36.48	%		31.14	%

66

DIRECTORS

FIRST COMMUNITY FINANCIAL CORPORATION

and

THE FIRST NATIONAL BANK OF MIFFLINTOWN

JOHN P. HENRY, III

Chairman of the Board of Directors of the Company and the Bank;

Vice President of JPH Enterprises, LLC, Port Royal, PA

ROGER SHALLENBERGER

Vice Chairman of the Board of Directors of the Company and the Bank;

President of KSM Enterprises

SCOTT E. FRITZ

President and Chief Executive Officer of the Company and the Bank

TIMOTHY P. STAYER

Executive Vice President and Chief Operating Officer of the Company and the Bank

LOWELL M. SHEARER

Secretary of the Board of Directors of the Company and the Bank; Self-employed

NANCY S. BRATTON

President of Bratton Insurance Inc., Millerstown and Mifflintown, PA

DANIEL B. BROWN

President and Owner of Brown Funeral Homes, Inc., Mifflintown and McAlisterville, PA

DAVID M. McMILLEN

Owner of David McMillen Custom Contracting, Inc, Loysville, PA

CHARLES C. SANER

Retired Dairy Farmer

DAVID L. SWARTZ

County Extension Director and Senior Dairy Educator for Penn State Cooperative Extension in Perry and Cumberland Counties

FRANK L. WRIGHT

Attorney-at-Law, Harrisburg, PA

67

Officers

FIRST COMMUNITY FINANCIAL CORPORATION

JOHN P. HENRY, III

Chairman

ROGER SHALLENBERGER

Vice Chairman

SCOTT E. FRITZ

President & Chief Executive Officer

TIMOTHY P. STAYER

Executive Vice President & Chief Operating Officer

LOWELL M. SHEARER

Secretary

RICHARD R. LEITZEL

Treasurer

JENNIFER S. KAUFFMAN

Assistant Secretary

BOBBI J. LEISTER

Assistant Secretary

68

OFFICERS

THE FIRST NATIONAL BANK OF MIFFLINTOWN

SCOTT E. FRITZ

President and Chief Executive Officer

TIMOTHY P. STAYER

Executive Vice President and Chief Operating Officer

KIMBERLY A. BENNER

Senior Vice President and Trust and Investment Services Division Manager

MATTHEW J. FORD

Senior Vice President and Chief Risk Officer

K. LEE HOPKINS

Senior Vice President and Chief Lending Officer

RICHARD R. LEITZEL

Senior Vice President and Chief Financial Officer

NANCI A. AUMILLER

Vice President and Operations Manager/AML and Security Officer

JAMES L. CORDELL

Vice President and Credit Administration Manager

G. LEWIS DAVEY

Vice President and Commercial Loan Officer

JEFFREY S. FAGAN

Vice President and Credit Officer

AUDRA L. HUNTER

Vice President and Market Manager, Perry County

NANETTE W. STAKE

Vice President and IT Manager/IT Security Officer

BILLIE JO DEITER

Assistant Vice President and Community Office Manager, Ickesburg Office

NATHAN M. DESMARAIS

Assistant Vice President and Human Resources Manager

FLORENCE E. DRESSLER

Assistant Vice President and Community Office Manager, Fermanagh Office

ROY A. LEISTER, JR.

Assistant Vice President and Community Office Manager, Delaware Office

CHRISTOPHER W. MEALS

Assistant Vice President and Commercial Loan Officer

J. NEAL SHAWVER

Assistant Vice President and Credit Analyst

BRADLEY D. SHERMAN

Assistant Vice President and Community Office Manager, West Perry and Loysville Offices

TINA T. SHIREY

Assistant Vice President and Commercial Loan Officer

DIANE M. SYKES

Assistant Vice President and Trust Officer

DIANE E. ZEIDERS

Assistant Vice President and Community Office Manager, Tuscarora Valley and East Waterford Offices

BRENDA F. BLAKEY

Accounting Specialist

BRIAN A. HUMMEL

Community Office Manager, Bloomfield Borough and New Bloomfield Offices

JENNIFER S. KAUFFMAN

Assistant Secretary

BOBBI J. LEISTER

Assistant Secretary/Corporate Relations and Marketing Officer

ADAM E. TRUITT

Trust Officer

JENNIFER L. WILSON

Credit Analyst

69

DIRECTORS EMERITIAND ADVISORY BOARDS

DIRECTORS EMERITI

DONALD Q. ADAMS

JOHN M. AUKER

JOSEPH E. BARNES, SR.

DALE BEASTON

WILLIAM A. GILLILAND

ELWOOD S. HENCH

C. ROBERT HOCKENBROCK

SAMUEL G. KINT

RAYMOND T. LONG

JANE B. MARHEFKA

CLAIR E. McMILLEN

PHYLLIS S. MOHLER

ROBERT E. SHEAFFER

JOHN A. TETWILER

RICHARD L. WIBLE

ADVISORY BOARDS

TUSCARORA VALLEY AND EAST WATERFORD OFFICES

DAVID S. CLARK

KEVIN L. LONG

NORMAN F. LOVE

JAMES M. SHEAFFER

BARBARA G. WILSON

FERMANAGH OFFICE

DAVID R. HICKS

RONALD H. MAST

RICHARD E. RHINE

SAMUEL RITZMAN

ALAN E. VARNER

DELAWARE OFFICE

DENNIS L. BASSLER

DANIEL L. BENNER

JEFFREY J. FRYMOYER

MERVIN J. STRAWSER

NEW BLOOMFIELD, SHERMANS DALE AND BLOOMFIELD BOROUGH OFFICES

WILLIAM R. BUNT

DARWIN L. KITNER

JOHN K. McCLELLAN

FRED E. MORROW

JAMES E. SWENSON

WEST PERRY, ICKESBURG AND LOYSVILLE OFFICES

AMOS S. ESH

CLEE L. McMILLEN

CHARLES C. NYCE

TERRY K. URICH

NEWPORT OFFICE

PETER E. BRUMMER

GERALD R. GABEL

TERRY J. HELLER

CHARLES C. SMITH

70

BANK LOCATIONS

First Community Financial Corporation

and Wholly Owned Subsidiary,

The First National Bank of Mifflintown

The First National Bank of Mifflintown is a full-service financial institution serving customers

from five locations in Juniata County, seven locations in Perry County and one location in Mifflin County.

JUNIATA & MIFFLIN COUNTIES	PERRY COUNTY
MAIN OFFICE AND TRUST & INVESTMENT SERVICES Two North Main Street Mifflintown, PA 17059 717-436-2144	BLOOMFIELD BOROUGH OFFICE 216 South Carlisle Street New Bloomfield, PA 17068 717-582-3977
DELAWARE OFFICE 24021 Rt. 333 Thompsontown, PA 17094 717-535-5158	ICKESBURG OFFICE 250 Tuscarora Path Ickesburg, PA 17037 717-438-3050
EAST WATERFORD OFFICE 9775 Rt. 75 South East Waterford, PA 17021 717-734-2400	LOYSVILLE OFFICE 3544 Shermans Valley Road Loysville, PA 17047 717-789-2400
FERMANAGH OFFICE 50 Stop Plaza Dr. Mifflintown, PA 17059 717-436-8968	NEW BLOOMFIELD OFFICE AND TRUST & INVESTMENT OFFICE 550 Shermans Valley Road New Bloomfield, PA 17068 717-582-7599
TUSCARORA VALLEY OFFICE 5804 William Penn Hwy Port Royal, PA 17082 717-436-8947	NEWPORT OFFICE 75 Red Hill Road Newport, PA 17074 717-567-2380
LEWISTOWN OFFICE LOAN PRODUCTION AND TRUST & INVESTMENT SERVICES 8 North Dorcas Street Lewistown, PA 17044 717-248-4583	SHERMANS DALE OFFICE 5201 Spring Road, Suite 5 Shermans Dale, PA 17090 717-582-7424
TOLL FREE 1-866-950-2144	WEST PERRY OFFICE 22 Veteran’s Way Elliottsburg, PA 17024 717-789-4500

ONLINE

www.fnbmifflintown.com

71

Stock and Dividend Information

The Corporation has only one class of common stock authorized, issued and outstanding. Although shares of the Corporation’s common stock are traded from time to time in private transactions, and in the over-the-counter market, there is no established public trading market for the stock. The Corporation’s common stock is not listed on any stock exchange or automated quotation system and there are no present plans to so list the stock. There can be no assurance that, at any given time, any persons will be interested in acquiring shares of the Corporation’s common stock. Price quotations for the Corporation’s common stock do not appear regularly in any generally recognized investment media.

The Corporation pays dividends on the outstanding shares of our common stock as determined by the Board of Directors from time to time. It has been the practice of the Board of Directors to declare cash dividends on a quarterly basis. Future dividends will depend upon our earnings, financial position, cash requirements and such other factors as the Board of Directors may deem relevant. The following table sets forth the cash dividends declared per share of the Corporation’s common stock and the highest and lowest per share prices at which the Corporation’s common stock has traded in private transactions and in the over-the-counter market during the periods indicated. To the best of management’s knowledge, such prices do not include any retail mark-up, mark-down or commission. Shares may have been sold in other transactions, the price and terms of which are not known to the Corporation. Therefore, the per share prices at which the Corporation’s stock has previously traded may not necessarily be indicative of the true market value of the shares.

	Per Share Sales Price				Dividends per Share
Quarter	High		Low
First, 2012	$	40.00	$	33.44	$	0.200
Second		40.00		39.50		0.205
Third		40.00		26.50		0.210
Fourth		39.00		30.00		0.365
First, 2011	$	29.75	$	26.91	$	0.180
Second		30.00		29.00		0.185
Third		32.00		29.00		0.190
Fourth		38.00		32.00		0.195

The authorized common stock of the Corporation consists of 10,000,000 shares of common stock, par value $5.00 per share, of which 1,412,362 shares were outstanding at December 31, 2012. There were no shares of the Corporation’s common stock (i) that are subject to outstanding options, warrants or securities convertible into common stock; (ii) that the Corporation has agreed to register under the Securities Act for sale by security holders; or (iii) that are or have been proposed to be publicly offered by the Corporation. The Corporation had approximately 857 shareholders of record as of December 31, 2012.

Annual Report on Form 10-K

The Corporation’s Annual Report on Form 10-K, which contains additional information about the Corporation, was filed with the Securities & Exchange Commission and may be obtained without charge, by writing to:

Mr. Richard R. Leitzel

Vice President & Chief Financial Officer

First Community Financial Corporation

P.O. Box 96

Mifflintown, PA 17059

The Form 10-K is also available on the Securities & Exchange Commission’s Internet site at http://www.sec.gov.

Notice of Annual Meeting

The Annual Meeting of Shareholders of the Corporation will be held on Tuesday, April 9, 2013, beginning at 10:00 a.m., at: Cedar Grove Brethren in Christ Church, located near the PA Route 75 and U.S. Route 22/322 interchange in Mifflintown, Pennsylvania. A Notice of the Annual Meeting, Proxy Statement and Proxy are being delivered together with this Annual Report to shareholders entitled to vote at the meeting.

72