Securities and Exchange Commission
Washington, D.C. 20549
Form 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT 0F 1934 FOR THE QUARTERLY PERIOD ENDED September 30, 2001
Commission file number 000-26117
FIRST COMMUNITY FINANCIAL CORPORATION
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(Exact name of registrant as specified in its charter)
NORTH CAROLINA 56-2119954
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
708 SOUTH CHURCH STREET, BURLINGTON, N.C. 27215
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(Address of principal executive offices)
336-229-2744
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(Registrant's telephone number, including area code)
NOT APPLICABLE
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(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
---------- ----------
1,616,483 common shares, no par value, were outstanding as of October 20, 2001.
FIRST COMMUNITY FINANCIAL CORPORATION
AND SUBSIDIARY
INDEX
Page
PART I FINANCIAL INFORMATION Number
Item 1 Financial Statements
Condensed Consolidated Balance Sheets 1
September 30, 2001 and December 31, 2000
Condensed Consolidated Statements of Income 2
Three and nine months ended September 30, 2001 and 2000
Condensed Consolidated Statements of Comprehensive Income 3
Three and nine months ended September 30, 2001 and 2000
Condensed Consolidated Statements of Cash Flow 4
Nine months ended September 30, 2001 and 2000
Notes to Condensed Consolidated Financial Statements 5-6
Item 2 Management's Discussion and Analysis of Financial Condition 7-15
and Results of Operations
PART II OTHER INFORMATION
Item 1 Legal Proceedings 16
Item 2 Changes in Securities and Use of Proceeds 16
Item 3 Defaults Upon Senior Securities 16
Item 4 Submission to Matters to a vote of Security Holders 16
Item 5 Other Information 16
Item 6 Exhibits and Reports on Form 8-K 16
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
First Community Financial Corporation
Condensed Consolidated Balance Sheets
(dollars in thousands)
September 30, 2001 December 31,2000
(unaudited)
------------------ ----------------
Assets
Cash and cash equivalents $ 8,982 $ 5,379
Investment Securities:
Available for sale 3,191 11,924
Mortgage-backed securities
Available for sale 36,904 8,728
FHLB, at cost which approximates market 1,925 1,925
Loans receivable held for sale 2,413
Loans receivable held for investment, net 146,495 166,180
Premises and equipment 4,175 4,355
Deferred income taxes 2,231 2,429
Other assets 4,715 3,785
--------- ---------
Total assets $ 211,031 $ 204,705
--------- ---------
Liabilities and Shareholders' Equity
Deposits:
Noninterest-bearing demand $ 2,063 $ 2,482
Interest-bearing demand 13,871 13,825
Savings 14,036 14,952
Certificates of deposits, $100,000 and over 30,034 23,509
Other time deposits 96,160 102,554
--------- ---------
Total deposits 156,164 157,322
--------- ---------
Borrowed money 6,339 0
Other liabilities 4,154 3,945
--------- ---------
Total liabilities 166,657 161,267
--------- ---------
Shareholders' equity:
Preferred stock, no par value, 5,000,000 shares authorized;
no shares issued or outstanding 0 0
Common stock, no par value, 20,000,000 shares authorized;
1,616,483 shares issued and outstanding at September 30,2001 and
1,608,083 shares issued and outstanding at December 31, 2000 23,431 22,428
Unearned ESOP shares, 127,672 shares at September 30, 2001 and
135,187 shares at December 31, 2000 (1,915) (2,028)
Deferred stock award - MRP (637) (851)
Retained earnings, substantially restricted 23,337 24,142
Accumulated other comprehensive income (loss), net 158 (253)
--------- ---------
Total shareholders' equity 44,374 43,438
--------- ---------
Total liabilities and shareholders' equity $ 211,031 $ 204,705
--------- ---------
See accompanying notes to condensed consolidated financial statements
1
Item 1. Continued
First Community Financial Corporation
Condensed Consolidated Statements of Income (Loss)
(unaudited)
(dollars in thousands)
Three Months Ended September 30, Nine Months Ended September 30,
2001 2000 2001 2000
--------------- --------------- ------------ --------------
Interest income:
Interest and fees on loans $ 3,101 $ 3,412 $ 9,797 $ 9,852
Interest and dividends on investments 642 1,011 1,558 3,152
---------- ---------- ---------- ----------
Total interest income 3,743 4,423 11,355 13,004
Interest expense:
Interest on deposits 1,724 1,990 5,626 5,530
Interest on borrowed money 75 539 191 1,567
---------- ---------- ---------- ----------
Total interest expense 1,799 2,529 5,817 7,097
---------- ---------- ---------- ----------
Net interest income before provision for loan losses 1,944 1,894 5,538 5,907
Provision for loan losses 360 105 540 305
---------- ---------- ---------- ----------
Net interest income 1,584 1,789 4,998 5,602
---------- ---------- ---------- ----------
Other income:
Total other operating income 835 146 1,157 446
General and administrative expenses:
Compensation and fringe benefits 904 957 2,817 2,816
Occupancy 71 84 229 213
Furniture and fixtures 97 87 291 261
Advertising 41 22 66 125
Data processing 80 54 260 148
Contributions 3 1 4 3
Other 624 246 1,253 822
---------- ---------- ---------- ----------
Total general and administrative expenses 1,820 1,451 4,920 4,388
---------- ---------- ---------- ----------
Income before income taxes 599 484 1,235 1,660
Income taxes 272 156 514 530
---------- ---------- ---------- ----------
Net income $ 327 $ 328 $ 721 $ 1,130
---------- ---------- ---------- ----------
PER SHARE DATA, calculated from June 21, 1999, the
date of the Company's initial public offering
Earnings per share, basic $ 0.23 $ 0.20 $ 0.50 $ 0.68
Earnings per shared, diluted $ 0.22 $ 0.20 $ 0.50 $ 0.68
Weighted average shares outstanding, basic 1,444,947 1,611,038 1,434,860 1,669,559
Weighted average shares outstanding, diluted 1,473,961 1,614,661 1,455,330 1,670,766
See accompanying notes to condensed consolidated financial statements
2
Item 1. Continued
First Community Financial Corporation
Condensed Consolidated Statements of Comprehensive Income (Loss)
(unaudited)
(dollars in thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
2001 2000 2001 2000
---- ---- ---- ----
Net income $ 327 $ 328 $ 721 $ 1,130
------- ------- ------- -------
Unrealized gain (loss) on available for sale securities 315 14 633 73
Reclassification of net (gains) losses recognized in net income (6) (10) (9) (146)
Income taxes relating to unrealized gain on available (105) (1) (213) 25
for sale securities -- --
Other comprehensive income (loss) 203 2 411 (49)
------- ------- ------- -------
Comprehensive income $ 530 $ 330 $ 1,132 $ 1,081
------- ------- ------- -------
See accompanying notes to condensed consolidated financial statements
3
Item 1. Continued
First Community Financial Corporation
Condensed Consolidated Statements of Cash Flows
(unaudited)
(dollars in thousands)
Nine months ended
September 30,
2001 2000
-------- --------
Cash flows from operating activities:
Net income $ 721 $ 1,130
Adjustments to reconcile net income (loss) to net cash provided by operating activities
Provision for loan losses 540 305
Depreciation 265 238
ESOP contribution 153 113
MRP compensation 215 372
Loss (gain) on sale of securities (9) 20
(Gain) on sale of assets 0 (54)
Amortization (accretion) of discounts on securities, net 54 (54)
Provision for deferred income taxes 0 (120)
Originations of loans held for sale (8,711) (690)
Proceeds from sale of loans held for sale 6,348 566
Net loss (gains) on sale of loans (50) (1)
Other operating activities 76 (1,521)
-------- --------
Net cash provided by (used in) operating activities (398) 304
-------- --------
Investing activities:
Purchases of investment securities available for sale (42,064) (1,525)
Proceeds from sales of securities available for sale 18,674 8,110
Proceeds from redemptions of securities available for sale 1,600 6,560
Proceeds from principal repayment of mortgage-backed securities available for sale 2,925 1,195
Net (increase) decrease in loans held for investment 19,145 (20,175)
Additions to other real estate (811) (658)
Proceeds from sale of premises and equipment 0 68
Purchases of premises and equipment (85) (1,747)
-------- --------
Net cash used in investing activities (616) (8,172)
-------- --------
Financing activities:
Net increase (decrease) in deposit accounts (1,158) 9,498
Proceeds from issuance of stock 145
Repurchase of common stock 0 (2,818)
Payment of dividends on common stock (709) (430)
Additions (repayments) of FHLB borrowings, net of proceeds 6,339 (500)
-------- --------
Net cash provided by financing activities 4,617 5,750
-------- --------
Increase (decrease) in cash and cash equivalents 3,603 (2,118)
Cash and cash equivalents, beginning of year 5,379 6,583
-------- --------
Cash and cash equivalents, end of period $ 8,982 $ 4,465
-------- --------
See accompanying notes to condensed consolidated financial statements
4
Item 1. Continued
First Community Financial Corporation
Notes to Condensed Consolidated Financial Statements
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles
for interim information and with the instructions to FORM 10-Q SB.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting only
of normal recurring accruals) considered necessary for a fair presentation
have been Included. Operating results for the periods presented are not
necessarily indicative of the results that may be expected for the year
ended December 31, 2001.
2. Conversion from Mutual to Stock form of Ownership
On June 14, 1999, members of Community Savings Bank, SSB eligible to vote
at a a special meeting, voted to approve the conversion of Community
Savings Bank, SSB. The conversion involved the transformation of Community
Savings Bank, SSB from mutual to stock form, First Community's acquisition
of all of the outstanding capital stock of Community Savings Bank, SSB and
First Community's sale of its common stock to the depositors and borrowers
of Community Savings Bank, SSB and other persons who had the right to
purchase shares. The sale was completed June 21,1999, and First Community
Financial Corporation began trading on June 21,1999 on the NASDAQ national
markets exchange under the symbol "FCFN". 1,880,798 shares of no par common
stock were issued raising $25.2 million of net proceeds.
3. Analysis of Allowance for Loan Loss
Nine months ended September 30,
-------------------------------
2001 2000
----------- ------------
(in thousands)
Beginning balance $ 2,353 $ 1,839
Provision for loan loss 540 305
Net charge-offs (435) (200)
------- -------
Balance, end of period $ 2,458 $ 1,944
======= =======
Ratio of net charge-offs to average loans
outstanding 0.27% 0.12%
Ratio of allowance to total loans outstanding 1.62% 1.11%
at end of period
Ratio of allowance to total nonperforming
assets at end of period 108.66% 116.97%
5
4. Net Income (Loss) Per Share of Common Stock
Basic income (loss) per share of common stock is computed by dividing net
income (loss) by the weighted average number of common shares outstanding
(less unearned ESOP shares and unearned stock grants) during the period.
Diluted net income (loss) per share of common stock is computed by dividing
net income (loss) by the weighted average number of common shares and
common stock equivalents outstanding during the period. For the nine month
period ended September 30, 2001, the weighted average number of shares
outstanding was 1,434,860. The effect, if any, on diluted earnings per
share of future periods of the stock awards described in note 5 will be
computed under the treasury stock method.
5. Stock Grant Awards
On June 27, 2000, the Company awarded 75,232 shares of stock to directors
and employees under the Community Savings Bank, Inc., Management
Recognition Plan and Trust, approved by shareholders on June 27, 2000. In
accordance with the provision of Accounting Principles Board Opinion No.
25, the Company will recognize the cost of the awards over the vesting
period. One-fourth of the shares were immediately vested upon award, and
the remainder will vest over the following 36 months. The Company acquired
75,232 shares from the public for an aggregate amount of $1,297,752. The
results for the nine months ended September 30, 2001 included expense of
$214,610 related to their award.
6. Subsequent Event
On October 4, 2001, the Company entered into an agreement to be acquired by
Capital Bank Corporation, Raleigh, NC. The transaction is expected to be
completed during the first quarter of 2002.
6
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward Looking Statements
Information set forth below contains certain forward-looking statements, which
are based on assumptions, and describes future plans, strategies and
expectations of First Community Financial Corporation ("First Community" or "the
company"). These forward-looking statements are generally identified by use of
the words "believe", "expect", "intend", "anticipate", "estimate", "project", or
similar expressions. First Community's ability to predict results or the actual
effect of future plans and strategies is inherently uncertain. Factors which
could have a materially adverse effect on the operations of First Community and
its wholly owned subsidiary, Community Savings Bank, Inc. ("Community Savings")
include, but are not limited to, changes in: interest rates, general economic
conditions, legislation and regulation, monetary and fiscal policies of the U.S.
Government including policies of the U.S. Treasury and the Federal Reserve
Board, the quality or composition of the loan or investment portfolios, demand
for loan products, deposit flows, competition, demand for financial services in
its market area and accounting principles and guidelines. These risks and
uncertainties should be considered in evaluating forward-looking statements and
undue reliance should not be placed on such statements.
Financial Condition At September 30, 2001
Compared to December 31, 2000
Total assets increased 3.1% to $211.0 million at September 30, 2001, compared to
$204.7 million at December 31, 2000. The increase in assets was principally a
result of a $23.9 million increase in securities and overnight investments and a
$2.4 million increase in loans held for sale, offset by a $19.7 million decrease
in loans held for investment, net of reserves.
Loans held for investment, net of reserves, decreased 11.9% at September 30,
2001 to $146.5 million from the December 31, 2000 balance of $166.2 million. The
loan portfolio decrease in outstanding balances is the result of a slower
economic environment and management's decision to sell most new originations of
single family mortgages into the secondary market to reduce interest rate risk
and market risk. At September 30, 2001, approximately 54.4% of the Community
Savings' gross loan portfolio consisted of loans secured by one- to- four family
residential properties. At December 31, 2000, 58.1% of gross loans were secured
by 1-4 family residential properties. Loan production continued to emphasize
commercial and consumer credits in an effort to diversify the loan portfolio and
reduce the reliance on single family 1-4 residential loans. Commercial loans
increased 11% or $4.5 million, compared to December 31, 2000.
7
Securities increased 94.1% at September 30, 2001 to $40.1 million compared to
the December 31, 2000 balance of $20.7 million. The increase in securities was
primarily incurred to offset the 11.9% decrease in loans held for investment.
The nine-month average balance of securities decreased 47.1 % for the period
ended September 30, 2001 to $29.5 million compared to the $55.8 million average
balance of securities for the nine month period ended September 30, 2000. The
average balance for 2000 reflected a match funded leveraged securities
transaction in the amount of $25 million that was removed during the 4th quarter
of 2000.
Deposits decreased to $156.2 million at September 30, 2001 from $157.3 million
at December 31, 2000, a decrease of 1%. Local deposit competition is very strong
causing upward pressure on deposit interest rates.
Borrowed funds, collateralized through an agreement with the Federal Home Loan
Bank ("FHLB"), increased to $6.3 million at September 30, 2001 from $0 at
December 31, 2000. FHLB borrowings of $1.3 million float with one-month LIBOR
index and mature June 30, 2002. The floating rate borrowings are matched with a
commercial loan with similar characteristics. The remaining $5 million of FHLB
borrowings are fixed rate proceeds used to facilitate normal loan growth and
deposit fluctuations. The fixed rate borrowings mature March 31, 2003.
Asset Quality
First Community's non-performing assets (loans 90 days or more delinquent and
fore- closed real estate and repossessed assets) were $2.3 million, or 1.07% of
total assets, at September 30, 2001, compared to $2.4 million, or 1.16% of total
assets, at December 31, 2000. Loans totaling $469 thousand were charged off
against the allowance for loan losses, partially off set by recoveries on
previously charged-off loans of $34 thousand. Net loans charged-off against the
allowance for loan losses totaled $435 thousand or 0.27% of average loans
outstanding.
Management performs a four-step procedure in determining the appropriate level
for the allowance for loan losses. First, at the end of each quarter, loan
department personnel perform a review of the bank's loan portfolio. Individual
loans are assigned an internal classification designation of unclassified,
substandard, doubtful, or loss based on historical performance and specific
circumstances known to the bank regarding the financial situation of the
customer. Next, impaired loans are identified and a determination is made as to
the necessity of creating a specific allowance. Any impairment allowance is
based on the expected cash flows or the fair market value of available
collateral for collateral dependent loans. There were no impaired loans at
September 30, 2001. Therefore, an allowance for impaired loans was unnecessary.
Next, the substandard and doubtful classifications are analyzed and a risk
percentage is determined considering each type of loan and the severity of any
probable loss. All loans categorized as "loss" are fully reserved. The final
procedure is to assign risk percentages to unclassified loans based on
historical and industry information regarding probable, yet unidentifiable,
losses inherent in the portfolio. Industry factors are adjusted to reflect
8
individual bank circumstances. Since First Community is entering new lines of
business with little past experience to draw on in the areas of commercial,
construction and consumer lending, an entry period of higher than industry norm
loss is reflected in the risk percentages assigned these loan categories.
In the opinion of management, the general allowance for loan losses of $2.5
million at September 30, 2001 was adequate to cover probable losses.
Results of Operation for the three month periods ended September 30, 2001 and
2000
Net income is influenced significantly by the performance of net interest
income. Net interest income is the difference between interest income (derived
from revenues generated from loans, investments and other earning-assets), and
interest expense (consisting principally of interest paid on deposits and
borrowings). Operations may be materially affected by national and international
economic conditions, monetary and fiscal policies of the Federal government, and
policies of regulatory authorities.
NET INCOME
Net income of $327 thousand was recorded for the three month period ended
September 30, 2001, compared to net income of $328 thousand for the three month
period ended September 30, 2000. Net interest income before the provision for
loan losses increased 2.64% or $50 thousand for the period ended September 30,
2001. Interest income decreased 15.4% or $680 thousand for the three months
ended September 30, 2001, which was offset by $730 thousand decrease in interest
expense or 28.9% for the same period. Net interest income after the loan loss
provision decreased 11.5%, or $205 thousand, reflecting management's decision to
increase the provision for loan losses to $360 thousand for the three months
ended September 30, 2001. Other operating income increased $689 thousand due
primarily to a one-time gain on the sale of mortgage servicing rights in the
amount of $674 thousand, net of amortized costs. Other operating expense
increased $369 thousand or 25.4% reflecting $170 thousand in one-time merger
related expenses, $50 thousand increase in repossessed asset expense, $26
thousand increase in data processing expense and $19 thousand increase in
advertising expense.
INTEREST INCOME
Interest income decreased 15.4% or $680 thousand for the three months ended
September 30, 2001 to $3.7 million compared to $4.4 million for the three months
ended September 30, 2000. The decrease in interest income is two fold. Interest
and fees on loans decreased 9.1% or $311 thousand reflecting a decrease in
average loan balances of 8.65% for the three-month period ended September 30,
2001. Interest income on investments decreased 36.5% or $369 thousand resulting
from a $15.1 million reduction in securities balances outstanding compared to
securities balances outstanding at September 30, 2000.
The average balance on total interest-earning assets decreased 9.5% or $21
million for the three months ended September 30, 2001 compared to average
balances during the same
9
period in 2000. The decreases resulted primarily from a $15.1 million decrease
in investment average balances due to the removal of a match funded leveraged
investment transaction during the 4th quarter of 2000, and a $14.6 million
decrease in net loan average balances. The average annualized yield on total
average interest-earning assets decreased 52 basis points from the 2000 three
month period, reflecting a decrease in the annualized yield on investments of
112 basis points and a decrease in annualized loan yields of 4 basis points.
INTEREST EXPENSE
Interest expense decreased 28.9% or $730 thousand to $1.8 million for the three
months ended September 30, 2001 compared to $2.5 million for the three months
ended September 30, 2000. The decrease in interest expense was a result of a
13.4% decrease in interest expense on deposits. A $464 thousand decrease in
interest expense on FHLB borrowing reflects the significant reduction in FHLB
advances resulting from the removal of a match funded structured investment
transaction during the 4th quarter of 2000.
The average balance of interest-bearing liabilities decreased 13.1% or $24.2
million for the three months ended September 30, 2001 compared to average
balances for the same period in 2000. The average annualized cost on total
average interest-bearing liabilities decreased 100 basis points from the 2000
three month period, resulting from an decrease in the annualized rate on FHLB
borrowings of 208 basis points and an decrease in annualized deposit costs of
184 basis points.
NET INTEREST INCOME
Net interest income before the provision for loan losses, for the three-month
period ended September 30, 2001, compared to the three-month period ended
September 30, 2000 decreased $50 thousand, reflecting a $680 thousand decrease
in interest income offset by a $730 thousand decrease in interest expense.
Comparable spreads and net interest margins were as follows:
Annualized Yield Annualized Cost
on Interest of Interest Annualized Annualized
Earning Assets Bearing Liabilities Spread Margin
-------------- ------------------- ------ ------
Three Months
Ended
September 30, `01 7.44% 4.48% 2.96% 3.88%
Three Months
Ended
September 30, `00 7.96% 5.48% 2.48% 3.40%
10
PROVISION FOR LOAN LOSSES
A provision of $360 thousand was added to the allowance for loan losses,
increasing the period end balance to $2.5 million or 1.62% of outstanding loans
at September 30, 2001. A provision of $105 thousand was added to the allowance
for loan losses for the three-month period ending June 30, 2000. The increase to
the allowance reflects the significant change in the loan portfolio composition,
the charge-offs in the third quarter, and current economic conditions.
NON-INTEREST INCOME
Non-interest income increased $689 thousand to $835 thousand for the three-month
period ended September 30, 2001 compared to $146 thousand for the three-month
period ended September 30, 2000. The increase in non-interest income for the
2001 period is primarily due to non-recurring gains on the sale of mortgage
servicing rights in the amount of $674 thousand, net of amortized costs,
realized in the third quarter of 2001.
NON-INTEREST EXPENSE
Non-interest expense increased 25.4% or $369 thousand to $1.8 million for the
three months ended September 30, 2001 compared to $1.5 million for the
three-month period ended September 30, 2000 reflecting $170 thousand in one-time
merger related expenses, $50 thousand increase in repossessed asset expense, $26
thousand increase in data processing expense and $19 thousand increase in
advertising expense.
INCOME TAXES
The income tax provision for the three month period ended September 30, 2001 was
$272 thousand compared to $156 thousand for the three months ended September 30,
2000, an increase of $116 thousand from the prior year period. The increase in
the tax provision is the result of increases in earnings before income taxes as
well as certain expenses related to the proposed merger that are not be
deductible for tax purposes for the three month period ended September 30, 2001.
The effective tax rates for the respective 2001 and 2000 periods were 45.3% and
32.2%.
Results of Operation for the nine month periods ended September 30, 2001 and
2000
NET INCOME
Net income for the nine months ended September 30, 2001 was $721 thousand, a
decrease of $409 thousand compared to the nine-month period ended September 30,
2000. Net income for the nine-month period ended September 30, 2000 was $1.1
million.
11
INTEREST INCOME
Interest income decreased $1.6 million or 12.7% for the nine months ended
September 30, 2001 to $11.4 compared from $13 million for the nine months ended
September 30, 2000. The decrease in interest income can be principally
attributed to a $25.4 million decrease in the average balance of interest
earning assets from 2000 to 2001, and a decrease in the average annualized yield
on interest earning assets from 7.80% to 7.68%.
INTEREST EXPENSE
Interest expense decreased 18% or $1.3 million for the nine months ended
September 30, 2001 compared to the nine months ended September 30, 2000. The
decrease in interest expense was principally a result of a 176 basis point
decrease in the cost of borrowings from the Federal Home Loan Bank. The
aggregate annualized cost of interest bearing liabilities decreased 28 basis
points. The average balance outstanding of interest bearing liabilities
decreased $24.5 million from $181.9 million at September 30, 2000 to $157.4
million at September 30, 2001, a decrease of 13.5%. The average outstanding
balance for interest bearing deposits increased $2.5 million to $152 million at
September 30, 2001 from $149.5 million at September 30, 2000. Average FHLB
borrowings decreased to $5.4 million at September 30, 2001 from $32.4 million at
September 30, 2000 or 83.3%.
NET INTEREST INCOME
Net interest income before the provision for loan losses, for the nine month
period ended September 30, 2001, decreased 6.3% or $369 thousand compared to the
nine month period ended September 30, 2000. The primary components affecting the
change in net interest income were a 12.7% decrease in interest income offset by
an 18% decrease in interest expense.
Comparable spreads and net interest margins were as follows:
Annualized Yield Annualized Cost
on Interest of Interest Annualized Annualized
Earning Assets Bearing Liabilities Spread Margin
-------------- ------------------- ------ ------
Nine Months
Ended
September 30, 2001 7.68% 4.92% 2.75% 3.76%
Nine Months
Ended
September 30, 2000 7.80% 5.20% 2.60% 3.52%
12
PROVISION FOR LOAN LOSSES
A provision of $540 thousand was added to the allowance for loan losses,
increasing the period end balance to $2.5 million or 1.62% of outstanding loans
at September 30, 2001. A provision of $305 thousand was added to the allowance
for loan losses for the period ending September 30, 2000. The increase to the
allowance reflects the significant change in the loan portfolio composition, the
charge-offs in 2001, and the current national and local economic enviornment.
NON-INTEREST INCOME
Non-interest income increased $711 thousand to $1.2 million for the nine month
period ended September 30, 2001 compared to the nine month period ended
September 30, 2000. The increase in non-interest income for the 2001 period is
primarily due to non-recurring gains on the sale of mortgage servicing rights in
the amount of $674 thousand dollars, net of amortized costs, realized in the
third quarter of 2001. Although management is encouraged by the increase in
non-interest income, continued emphasis will be placed on improving non-interest
income revenue.
NON-INTEREST EXPENSE
Non-interest expense increased 12.2% or $532 thousand for the nine months ended
September 30, 2001 compared to the nine month period ended September 30, 2000.
The increase in non-interest expense was due primarily to $170 thousand in
one-time merger related expenses, $50 thousand increase in repossessed asset
expense, $112 thousand increase in data processing expense and $30 thousand
increase in furniture and fixture expense.
INCOME TAXES
Income tax expense for the nine month period ended September 30, 2001 was $514
thousand compared to a tax provision of $530 thousand for the nine months ended
September 30, 2000, a decrease of $16 thousand from the prior year. The decrease
in the tax provision was principally a result of a decrease in income before
income tax. The average tax rate for the nine months ended September 30, 2001
and 2000 were 41.6% and 31.9%, respectively. The tax provision takes into
consideration certain expenses related to the proposed merger that are not be
deductible for tax purposes for the nine month period ended September 30, 2001
LIQUIDITY
The Company's policy is to maintain adequate liquidity to meet continuing loan
demand and withdrawal requirements while paying normal operating expenses and
satisfying regulatory liquidity guidelines. Maturing securities, principal
repayments of loans and securities, deposits, income from operations and
borrowings are the main sources of
13
liquidity. Short-term investments (overnight investments with the Federal Home
Loan Bank and Federal Funds Sold) and short-term borrowings (Federal Home Loan
Bank advances, Repurchase Agreements and Federal Funds Purchased) are the
primary cash management liquidity tools. The investment portfolio provides
secondary liquidity.
At September 30, 2001, the estimated market value of liquid assets (cash, cash
equivalents, and marketable securities) was approximately $51.5 million,
representing 31.7% of deposits and borrowed funds. As Community Savings
continues to grow its loan portfolio, liquidity will continue to be leveraged.
The primary uses of liquidity are to fund loans, provide for deposit
fluctuations and invest in other non-loan earning assets when excess liquidity
is available. At September 30, 2001, outstanding off-balance sheet commitments
to extend credit in the form of loan originations totaled $3.4 million.
Available lines of credit totaled $20.3 million. Management considers current
liquidity levels adequate to meet the Company's cash flow requirements.
CAPITAL
Shareholders' equity at September 30, 2001 was $44.4 million, an increase of
$936 thousand or 2.2% from $43.4 million at December 31, 2000. Included in
shareholder's equity at September 30, 2001 was $158 thousand, net of tax, of
accumulated other comprehensive income related to unrealized gains on securities
available for sale compared to $253 thousand of accumulated other comprehensive
loss related to unrealized losses on securities available for sale at December
31, 2000. Also included in shareholder's equity at September 30, 2001 was $1.9
million of unearned common stock for the Employee Stock Ownership Plan,
representing 127,672 shares of common stock.
FDIC regulations require banks to maintain certain capital adequacy ratios,
leverage ratios and risk-based capital ratios. Banks supervised by the FDIC must
maintain a minimum leverage ratio of core (Tier I) capital to average adjusted
assets ranging from 3% to 5%. At September 30, 2001, Community Savings' ratio of
Tier I capital to average assets was 15.9%. The FDIC's risk-based capital
guidelines require banks to maintain risk-based capital to risk-weighted assets
of at least 8%. Risk-based capital for Community Savings is defined as Tier I
capital and the reserve for loan losses. At September 30, 2001, Community
Savings had a ratio of qualifying total capital to net risk-weighted assets of
28.2%.
First Community is also subject to capital adequacy guidelines of the Board of
Governors of the Federal Reserve (the "Federal Reserve Board"). Capital
requirements of the Federal Reserve Board are similar to those of the FDIC.
First Community significantly exceeds regulatory capital requirements.
Management anticipates that the Company will continue to exceed capital adequacy
requirements without altering current operations or strategies.
14
Recent Events
On October 4, 2001 the Company entered into an agreement to be acquired by
Capital Bank Corporation, Raleigh, NC. The transaction is expected to be
completed in the first quarter of 2002. The combined institutions will have
total assets of more than $600 million and eighteen banking locations in seven
counties. Recent Accounting Pronouncements
The FASB has issued Statements of Financial Accounting Standards No. 141 (FAS
141), Business Combinations, and No. 142 (FAS 142), Goodwill and Other
Intangible Assets.
FAS 141 supersedes APB Opinion No. 16, Business Combinations, and FASB Statement
No. 38, Accounting for Preacquisition Contingencies of Purchased Enterprises and
requires that all business combinations be accounted for using the purchase
method. This Statement carries forward without reconsideration those portions of
APB Opinion No. 16, Business Combinations, that provide guidance related to the
application of the purchase method. This Statement requires that intangible
assets that meet certain criteria be recognized as assets apart from goodwill.
The provisions of this Statement apply to all business combinations initiated
after June 30, 2001. This Statement also applies to all business combinations
accounted for using the purchase method for which the date of acquisition is
July 1, 2001, or later.
FAS 142 addresses financial accounting and reporting for acquired goodwill and
other intangible assets and supersedes APB Opinion No. 17, Intangible Assets. It
addresses how intangible assets that are acquired individually or with a group
of other assets (but not those acquired in a business combination) should be
accounted for in financial statements upon their acquisition. This Statement
also addresses how goodwill and other intangible assets should be accounted for
after they have been initially recognized in the financial statements. This
Statement carries forward without reconsideration those provisions of Opinion 17
related to the accounting for internally developed intangible assets. The
provisions of this Statement are required to be applied starting with fiscal
years beginning after December 15, 2001 and early application is permitted for
entities with fiscal years beginning after March 15, 2001, under certain
conditions. Impairment losses for goodwill and indefinite-lived intangible
assets that arise due to the initial application of this Statement (resulting
from a transitional impairment test) are to be reported as resulting from a
change in accounting principle.
In June 2001, the FASB issued Statement 143, Accounting for Asset Retirement
Obligations. FAS 143 requires that obligations associated with the retirement of
a tangible long-lived asset to be recorded as a liability when those obligations
are incurred, with the amount of the liabilty initially measured at fair value.
FAS 143 will be effective for financial statements for fiscal years beginning
after June 15, 2002 (early application is incouraged). Adoption of this
statement is not expected to have a material impact on the company's reported
results of operations, financial position or cash flows.
In July 2001, the (FASB) issued Statement No. 144 (FAS 144) Accounting for
Impairment or Disposal of Long-Lived Assets. FAS 144 superseeds FAS1 121 and
applies to all long-lived assets (including discontinued operations) and
consequently amends Accounting Principles Board Opinion No. 30 (APB 30),
Reporting Results of Operations Reporting the Effects of Disposal of a Segment
of Business. FAS 144 requires that long-lived assets that are to be disposed of
by sale be measured at the lower of book value or fair value less cost to sell.
FAS 144 is effective for financial statements issued for fiscal years beginning
after December 15, 2001 and generally, its provisions are to be applied
prospectively. Adoption of this statement is not expected to have a material
impact on the Company's reported results of operations, financial position or
cash flows.
The Company is currently evaluating the effect of adopting these pronouncements.
15
Part II - Other Information
Item 1
Legal proceedings.
None.
Item 2
Changes in Securities and Use of Proceeds.
(a) Not applicable
(b) Not applicable
(c) Not applicable
(d) Not applicable
Item 3
Defaults upon Senior Securities
Not applicable.
Item 4
Submission of Matters to a vote of securities holders.
None.
Item 5
Other information.
Not applicable.
Item 6
Exhibits and reports on form 8-K.
(a) Exhibits
(b) Reports on Form 8-K.
A form 8-K was filed on October 12, 2001 to announce the signing of a
merger agreement between First Community Financial Corporation, Burlington,
NC, and Capital Bank Corporation, Raleigh, NC.
16
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
First Community Financial Corporation
-------------------------------------
Registrant
Date 11/2/2001 /S/ Christopher B. Redcay
---------------- -------------------------------------
Christopher B. Redcay
Sr. Vice President, Treasurer and
Chief Financial Officer