UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-SB
GENERAL FORM FOR REGISTRATION OF SECURITIES OF
SMALL BUSINESS ISSUERS
Under Section 12(b) or (g) of the Securities Exchange Act of 1934
First Community Financial Corporation
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(Name of Small Business Issuer in its Charter)
Pennsylvania 23-2321079
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(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
Two North Main Street
Mifflintown, Pennsylvania 17059
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(Address of principal executive offices) (zip code)
Issuer's telephone number: (717) 436-2144
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Securities to be registered under Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
None. None.
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Securities to be registered under Section 12(g) of the Act:
Common Stock, $5.00 par value
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(Title of class)
INDEX
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Description Page
PART I
Item 1. Description of Business 3
Item 2. Management's Discussion and Analysis or Plan of Operation 11
Item 3. Description of Property 24
Item 4. Security Ownership of Certain Beneficial Owners and Management 26
Item 5. Directors and Executive Officers, Promoters and Control Persons 28
Item 6. Executive Compensation 29
Item 7. Certain Relationships and Related Transactions 31
Item 8. Description of Securities 31
PART II
Item 1. Market Price of and Dividends on the Registrant's Common Equity and
Related Stockholder Matters 34
Item 2. Legal Proceedings 36
Item 3. Changes in and Disagreements with Accountants 36
Item 4. Recent Sales of Unregistered Securities 36
Item 5. Indemnification of Directors and Officers 37
PART F/S 38
PART III
Item 1. Index to Exhibits 63
Item 2. Description of Exhibits 64
PART I
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ITEM 1 DESCRIPTION OF BUSINESS
First Community Financial Corporation (the "Corporation") is a one bank
holding company incorporated under the laws of the Commonwealth of Pennsylvania
and registered under the Bank Holding Company Act of 1956, as amended. The
Corporation is headquartered in Mifflintown, Pennsylvania and was organized on
November 13, 1984 for the purpose of acquiring First National Bank of
Mifflintown (the "Bank") as a wholly-owned national bank subsidiary. The
Corporation's principal activity consists of owning and supervising the Bank,
which is engaged in providing banking and banking related services in central
Pennsylvania, principally in Juniata and Perry Counties. The day-to-day
management of the Bank is conducted by its officers, subject to review by its
Board of Directors. Each Director of the Corporation also is a Director of the
Bank. The Corporation derives substantially all of its current income from the
Bank. The Corporation also has made certain investments in other Pennsylvania
banking institutions, the dividends on which also are included in its current
income.
First National Bank of Mifflintown.
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The Bank became a wholly-owned subsidiary of the Corporation pursuant to a
Plan of Reorganization and Merger consummated in April 1985. The Bank was
originally chartered as a private bank in 1864 and converted to a national bank
in 1889. The Bank conducts business through ten full service banking offices.
The main banking office is located in the Borough of Mifflintown, four branch
offices are maintained in Juniata County and five branch offices are maintained
in Perry County, Pennsylvania.
As of December 31, 2001, the Bank had total assets of $182 Million, total
shareholders' equity of $13 Million, and total deposits of $154 Million.
The deposits of the Bank are insured by the Federal Deposit Insurance
Corporation (the "FDIC") to the extent provided by law. The Bank provides a wide
range of banking services to businesses and individuals, with particular
emphasis on serving the needs of the individual consumer. Banking services
include secured and unsecured financing, real estate financing, agricultural
financing, mortgage lending, and trust and other related services, as well as
checking, savings and time deposits, and a wide variety of other financial
services to individuals, businesses, municipalities and governmental bodies.
The Bank's Trust Department provides a broad range of personal and
corporate trust services. It administers and provides investment management
services for estates, trusts, agency accounts and employee benefit plans. For
the year ended December 31, 2001, income from the Bank's trust related
activities amounted to $173,853 and the Bank had assets worth $39 million under
management in its Trust Department at that time.
3
The Bank is subject to regulation and periodic examination by the Office of
the Comptroller of the Currency (the "OCC").
Market Area and Competition.
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The Bank's market area lies within Juniata and Perry Counties,
Pennsylvania. By all indications, this region has good economic prospects.
Juniata and Perry Counties had a combined population of approximately 66,000 in
2000, representing an increase from 1990 of 10.6% for Juniata County and 5.9%
for Perry County. The primary industries in the region are agriculture and
timber/woodworking. Unemployment rates in 2000 of 7.1% in Juniata County and
3.0% in Perry County reflect a relatively stable workforce. With a stable
workforce and growing population, the Corporation believes that the region's
economic prospects are positive.
As of June 30, 2001, four commercial banks (the Bank, Juniata Valley Bank,
Omega Bank, N.A. and Mifflinburg Bank & Trust Company) operated offices in
Juniata County. Of all financial institutions operating in Juniata County, the
Bank ranked second in terms of total deposits at June 30, 2001 with 35.78%. The
Juniata Valley Bank ranked first with 44.03% and Omega Bank, N.A. ranked third
with 13.29%. With the exception of Mifflinburg Bank & Trust, each of the
institutions with which the Bank competes in Juniata County is substantially
larger than the Bank. With the advantages of larger asset and capital bases,
these competitors tend to have larger lending limits and tend to offer a wider
variety of services than does the Bank.
In Perry County, the Bank faces competition from seven banks. Many of these
competitors also are substantially larger than the Bank and are likely to enjoy
the competitive advantages provided by larger asset and capital bases. Moreover,
the Perry County market is less concentrated, and therefore more competitive,
than the Juniata County market. The Bank's principal competitors in Perry County
are Bank of Landisburg, with approximately 28.35% of deposits at June 30, 2001,
and First National Bank of Newport, with approximately 18.86%. The Bank has
7.59% of the deposits in Perry County.
The Bank also competes with other types of financial institutions,
including credit unions, finance companies, brokerage firms, insurance companies
and retailers. Deposit deregulation has intensified the competition for deposits
in recent years.
Supervision and Regulation
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As a bank holding company, the Corporation is subject to regulation by the
Pennsylvania Department of Banking and the Federal Reserve Board. The deposits
of the Bank are insured by the Federal Deposit Insurance Corporation ("FDIC")
and the Bank is a member of the Bank Insurance Fund which is administered by the
FDIC. The Bank is therefore subject to regulation by the FDIC but, as a national
bank, is primarily regulated and examined by the Office of the Comptroller of
the Currency ("OCC").
The Corporation is required to file with the Federal Reserve Board an
annual report and such additional information as the Federal Reserve Board may
require pursuant to the Bank
4
Holding Company Act of 1956, as amended (the "BHC Act"). The Federal Reserve
Board may also make examinations of the Corporation. The BHC Act requires each
bank holding company to obtain the approval of the Federal Reserve Board before
it may acquire substantially all the assets of any bank, or before it may
acquire ownership or control of any voting shares of any bank if, after such
acquisition, it would own or control, directly or indirectly, more than five
percent of the voting shares of such bank.
Pursuant to provisions of the BHC Act and regulations promulgated by the
Federal Reserve Board thereunder, the Corporation may only engage in or own
companies that engage in activities deemed by the Federal Reserve Board to be
closely related to the business of banking or managing or controlling banks, and
the Corporation must gain permission from the Federal Reserve Board prior to
engaging in most new business activities.
A bank holding company and its subsidiaries are subject to certain
restrictions imposed by the BHC Act on any extensions of credit to the Bank or
any of its subsidiaries, investments in the stock or securities thereof, and on
the taking of such stock or securities as collateral for loans to any borrower.
A bank holding company and its subsidiaries are also prevented from engaging in
certain tie-in arrangements in connection with any extension of credit, lease or
sale of property or furnishing of services.
Source of Strength Doctrine.
Under Federal Reserve Board regulations, a bank holding company is required
to serve as a source of financial and managerial strength to its subsidiary
banks and may not conduct its operations in an unsafe or unsound manner. In
addition, it is the Federal Reserve Board's policy that in serving as a source
of strength to its subsidiary banks, a bank holding company should stand ready
to use available resources to provide adequate capital funds to its subsidiary
banks during periods of financial stress or adversity and should maintain the
financial flexibility and capital-raising capacity to obtain additional
resources for assisting its subsidiary banks. A bank holding company's failure
to meet its obligations to serve as a source of strength to its subsidiary banks
will generally be considered by the Federal Reserve Board to be an unsafe and
unsound banking practice or a violation of the Federal Reserve Board regulations
or both. This doctrine is commonly known as the "source of strength" doctrine.
Dividends.
Dividends are paid by the Corporation from its earnings, which are mainly
provided by dividends from the Bank. However, certain regulatory restrictions
exist regarding the ability of the Bank to transfer funds to the Corporation in
the form of cash dividends, loans or advances. The approval of the Comptroller
of the Currency is required if the total of all dividends declared by a national
bank in any calendar year exceeds the Bank's net profits (as defined) for that
year combined with its retained net profits for the preceding two calendar
years. Under this restriction, the Bank, without prior regulatory approval, can
currently declare dividends to the Corporation totaling approximately
$2,438,000.
5
Capital Adequacy.
The federal banking regulators have adopted risk-based capital guidelines
for bank holding companies and banks, such as the Corporation and the Bank.
Currently, the required minimum ratio of total capital to risk-weighted assets
(including off-balance sheet activities, such as standby letters of credit) is
8%. At least half of the total capital is required to be Tier 1 capital,
consisting principally of common shareholders' equity, non-cumulative perpetual
preferred stock, a limited amount of cumulative perpetual preferred stock and
minority interests in the equity accounts of consolidated subsidiaries, less
goodwill. The remainder (Tier 2 capital) may consist of a limited amount of
subordinated debt and intermediate-term preferred stock, certain hybrid capital
instruments and other debt securities, perpetual preferred stock and a limited
amount of the general loan loss allowance.
In addition to the risk-based capital guidelines, the Federal banking
regulators established minimum leverage ratio (Tier 1 capital to total assets)
guidelines for bank holding companies. These guidelines provide for a minimum
leverage ratio of 3% for those bank holding companies which have the highest
regulatory examination ratings and are not contemplating or experiencing
significant growth or expansion. All other bank holding companies are required
to maintain a leverage ratio of at least 1% to 2% above the 3% stated minimum.
The Corporation and the Bank exceed all applicable capital requirements.
FDICIA.
The Federal Deposit Insurance Corporation Improvement Act ("FDICIA") was
enacted into law in 1991. FDICIA established five different levels of
capitalization of financial institutions, with "prompt corrective actions" and
significant operational restrictions imposed on institutions that are capital
deficient under the categories. The five categories are: well capitalized,
adequately capitalized, undercapitalized, significantly undercapitalized and
critically undercapitalized.
To be considered well capitalized, an institution must have a total risk-
based capital ratio of at least 10%, a Tier 1 risk-based capital ratio of at
least 6%, a leverage capital ratio of 5%, and must not be subject to any order
or directive requiring the institution to improve its capital level. An
institution falls within the adequately capitalized category if it has a total
risk-based capital ratio of at least 8%, a Tier 1 risk-based capital ratio of at
least 4%, and a leverage capital ratio of at least 4%. Institutions with lower
capital levels are deemed to be undercapitalized, significantly undercapitalized
or critically undercapitalized, depending on their actual capital levels. In
addition, the appropriate federal regulatory agency may downgrade an institution
to the next lower capital category upon a determination that the institution is
in an unsafe or unsound condition, or is engaged in an unsafe or unsound
practice. Institutions are required under FDICIA to closely monitor their
capital levels and to notify their appropriate regulatory agency of any basis
for a change in capital category. Regulatory oversight of an institution
becomes more stringent with each lower capital category, with certain "prompt
corrective actions" imposed depending on the level of capital deficiency. On
December 31, 2001, the Corporation and the Bank each exceeded the minimum
capital levels of the well capitalized category.
6
Other Provisions of FDICIA.
Each depository institution must submit audited financial statements to its
primary regulator and the FDIC, which reports are made publicly available. In
addition, the audit committee of each depository institution must consist of
outside directors and the audit committee at "large institutions" (as defined by
FDIC regulation) must include members with banking or financial management
expertise. The audit committee at "large institutions" must also have access to
independent outside counsel. In addition, an institution must notify the FDIC
and the institution's primary regulator of any change in the institution's
independent auditor, and annual management letters must be provided to the FDIC
and the depository institution's primary regulator. The regulations define a
"large institution" as one with over $500 million in assets, which does not
include the Bank. Also, under the rule, an institution's independent auditor
must examine the institution's internal controls over financial reporting.
Under FDICIA, each federal banking agency must prescribe certain safety and
soundness standards for depository institutions and their holding companies.
Three types of standards must be prescribed: asset quality and earnings,
operational and managerial, and compensation. Such standards would include a
ratio of classified assets to capital, minimum earnings, and, to the extent
feasible, a minimum ratio of market value to book value for publicly traded
securities of such institutions and holding companies. Operational and
managerial standards must relate to: (i) internal controls, information systems
and internal audit systems, (ii) loan documentation, (iii) credit underwriting,
(iv) interest rate exposure, (v) asset growth, and (vi) compensation, fees and
benefits.
Provisions of FDICIA relax certain requirements for mergers and
acquisitions among financial institutions, including authorization of mergers of
insured institutions that are not members of the same insurance fund, and
provide specific authorization for a federally chartered savings association or
national bank to be acquired by an insured depository institution.
Under FDICIA, all depository institutions must provide 90 days notice to
their primary federal regulator of branch closings, and penalties are imposed
for false reports by financial institutions. Depository institutions with assets
in excess of $250 million must be examined on-site annually by their primary
federal or state regulator or the FDIC.
FDICIA also sets forth Truth in Savings disclosure and advertising
requirements applicable to all depository institutions.
FDIC Insurance.
As an institution whose deposits are insured by the FDIC, the Bank is also
subject to insurance assessments imposed by the FDIC. The FDIC has adopted a
risk related premium assessment system for both the Bank Insurance Fund ("BIF")
for banks and the Savings Association Insurance fund ("SAIF") for savings
associations. Under this system, FDIC insurance premiums are assessed based on
capital and supervisory measures.
7
Under the risk related premium assessment system, the FDIC, on a semiannual
basis, assigns each institution to one of three capital groups (well
capitalized, adequately capitalized, or undercapitalized) and further assigns
such institution to one of three subgroups within a capital group corresponding
to the FDIC's judgment of its strength based on supervisory evaluations,
including examination reports, statistical analysis, and other information
relevant to gauging the risk posed by the institution. Only institutions with a
total risk-based capital to risk-adjusted assets ratio of 10% or greater, a Tier
1 capital to risk adjusted assets ratio of 6% or greater, and a Tier 1 leverage
ratio of 5% or greater, are assigned to the well capitalized group.
On September 30, 1996, the President of the United States signed into law
the Deposit Insurance Funds Act of 1996 to recapitalize the Savings Association
Insurance Fund ("SAIF") administered by the Federal Deposit Insurance
Corporation ("FDIC") and to provide for repayment of the FICO (Financial
Institution Collateral Obligation) bonds issued by the United States Treasury
Department. The FDIC levied a one time special assessment on SAIF deposits equal
to 65.7 cents per $100 of the SAIF accessible deposit base as of March 31, 1995.
During 1997, 1998 and 1999, the Bank Insurance Fund ("BIF") paid $322 million of
FICO debt service, and SAIF paid $458 million. Since 1999, BIF and SAIF share
the FICO cost equally. The FICO assessment rate is adjusted quarterly to reflect
changes in the assessment bases of the respective funds based on quarterly Call
Report submissions. As always, the FDIC will be able to raise the assessments as
necessary to maintain the funds at their target capital ratios provided by law.
For the fourth quarter of 2001, the FICO assessment rate for BIF and SAIF was
approximately 1.84 cents per $100 of deposits. The FICO bonds will mature in
2017-2019, ending the interest payment obligation.
In 2001, the Bank's FDIC assessment was $24,908.31.
Community Reinvestment Act.
Under the Community Reinvestment Act of 1977 ("CRA") and implementing
regulations of the banking agencies, a financial institution has a continuing
and affirmative obligation, consistent with safe and sound operation, to meet
the credit needs of its entire community, including low and moderate income
neighborhoods. The CRA does not establish specific lending requirements or
programs for financial institutions, nor does it limit an institution's
discretion to develop the types of products and services it believes to be best
suited to its particular community. The CRA requires that bank regulatory
agencies conduct regular CRA examinations and provide written evaluations of
institutions' CRA performance. The CRA also requires that an institution's CRA
performance rating be made public. CRA performance evaluations are based on a
four-tiered rating system: Outstanding, Satisfactory, Needs to Improve and
Substantial Noncompliance. Although CRA examinations occur on a regular basis,
CRA performance evaluations have been used principally in the evaluation of
regulatory applications submitted by an institution. CRA performance evaluations
are considered in evaluating applications for such things as mergers,
acquisitions and applications to open branches. A bank holding company cannot
elect to be a "financial holding company" with the expanded securities,
insurance and other powers that designation entails unless all of the depository
institutions owned by the holding company have a CRA rating of satisfactory or
better. The Gramm-Leach-
8
Bliley Act also provides that a financial institution with total assets of $250
million or less, such as the Bank, will be subject to CRA examinations no more
frequently than every 5 years if its most recent CRA rating was "outstanding,"
or every 4 years if its rating was "satisfactory." Following a CRA examination
as of September 21, 1998, the Bank received a rating of "satisfactory."
Financial Services Modernization Legislation.
In 1999, the Gramm-Leach-Bliley Act was signed into law. This financial
services reform law has had and will continue to have a significant impact on
all financial institutions, including banks. The impact of the act is two-fold.
First, the Act has swept away much of the regulatory structure established in
the 1930's under the Glass-Steagall Act. The law creates opportunities for
banks, other depository institutions, insurance companies, and securities firms
to enter into business combinations that permit a single financial services
organization to offer customers a complete array of financial products. The
result will be increased competition in the market place for banks and other
financial institutions, tempered by an enhanced ability to compete in this new
market. Banks, insurance companies and securities firms may now affiliate
through a "financial holding company" and engage in a broad range of activities
authorized by the Federal Reserve Board and the Department of Treasury. The new
activities that the act permits for financial holding companies and their
affiliates are those that are financial in nature or incidental to financial
activities, including insurance underwriting, investment banking, investment
advisory services and securities brokerage services. The Federal Reserve
maintains the authority to require that the financial holding company remain
well capitalized and well managed.
In addition, national banks are authorized to conduct these activities
through "financial subsidiaries," under the supervision of the Department of
Treasury's Office of the Comptroller of the Currency, except that national bank
subsidiaries may not engage in insurance underwriting, merchant banking,
insurance company portfolio investment, or real estate investment and
development.
Secondly, the Act has altered the regulatory boundaries for all financial
services organizations, including the Bank. For example, by repealing an
exemption from SEC broker/dealer registration formerly enjoyed by banks for
their securities activities, the Act adds a potential layer of SEC regulation to
the bank's regulatory structure.
To the extent that the Gramm-Leach-Bliley Act permits banks, securities
firms and insurance companies to affiliate, the financial services industry may
experience further consolidation. This could result in a growing number of
larger financial institutions that offer a wider variety of financial services
than the Bank is able to offer and that can aggressively compete in the markets
that the Bank intends to serve.
9
Privacy
Under the Gramm-Leach-Bliley Act, federal banking regulators adopted rules
that limit the ability of banks and other financial institutions to disclose
non-public information about consumers to nonaffiliated third parties. These
limitations require disclosure of privacy policies to consumers and, in some
circumstances, will allow consumers to prevent disclosure of certain personal
information to a nonaffiliated third party. Pursuant to the rules, financial
institutions must provide:
. initial notices to customers about their privacy policies, describing
the conditions under which they may disclose nonpublic personal
information to nonaffiliated third parties and affiliates;
. annual notices of their privacy policies to current customers; and
. a reasonable method for customers to "opt out" of disclosures to
nonaffiliated third parties.
Sales of Insurance Products
In December 2000, pursuant to the requirements of the Gramm-Leach-Bliley
Act, the federal bank and thrift regulatory agencies adopted consumer protection
rules for the sale of insurance products by depository institutions. The rule
became effective on October 1, 2001. The final rule applies to any depository
institution or any person selling, soliciting, advertising or offering insurance
products or annuities to a consumer at an office of the institution or on behalf
of the institution. The regulation requires oral and written disclosure before
the completion of the sale of an insurance product or annuity that such product:
. is not a deposit or other obligation of, or guaranteed by, the
depository institution or its affiliate;
. is not insured by the FDIC or any other agency of the United States,
the depository institution or its affiliates; and
. has certain risks of investment, including the possible loss of value.
The depository institution may not condition an extension of credit on the
consumer's purchase of an insurance product or annuity from the depository
institution or from any of its affiliates, or on the consumer's agreement not to
obtain, or a prohibition on the consumer from obtaining, an insurance product or
annuity from an unaffiliated entity. Furthermore, to the extent practicable, a
depository institution must keep insurance and annuity sales activities
physically segregated from the areas where retail deposits are routinely
accepted from the general public. The rule also addresses cross marketing and
referral fees.
10
Proposed Legislation and Regulations
From time to time, various federal and state legislation is proposed that
could result in additional regulation of, and restrictions on, the business of
the Corporation or the Bank, or otherwise change the business environment. We
cannot predict whether any of this legislation, if enacted, will have a material
effect on the business of the Corporation or the Bank.
Employees
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As of December 31, 2001, the Bank had a total of 55 full-time and 36 part-
time employees.
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion represents management's analysis of the financial
condition and results of operations of 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.
11
The consolidated financial statements include the Corporation and its
wholly owned subsidiary, The First National Bank of Mifflintown. All significant
inter-company accounts and transactions have been eliminated.
Critical Accounting Policies
Disclosure of the Corporation's significant accounting policies is included
in Note 1 to the consolidated financial statements. Certain of these policies
are particularly sensitive requiring significant judgments, estimates and
assumptions to be made by management. Additional information is contained in
Management's Discussion and Analysis for the most sensitive of these issues,
including the provision and allowance for loan losses (see pages 14 and 19 -
20 and Notes 1 and 6 to the consolidated financial statements).
Significant estimates are made by management in determining 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.
Overview
In 2001, the Corporation recorded net income of $1,301,500, an increase of
$280,229 or 27.4%, from net income of $1,021,271 in 2000. Improvement in net
interest income, increased non-interest income and a reduction in the provision
for loan losses led to overall improved earnings for 2001. Net interest income
increased $240,486 in 2001 compared to 2000. While increased volume in loans
and securities was the major contributor to increased interest income, the
overall decline in interest rates offset a major portion of the increase in net
interest income. Non-interest income increased $137,822 in 2001 compared to
2000, which was primarily attributable to realized gains on sales of securities,
commissions on debit cards, earnings on the cash value of insurance, and
increased service charges on deposit accounts and insufficient fund fees
collected. Basic earnings per share were $1.86 in 2001 compared to $1.48 in
2000.
Return on average assets was 0.78% for 2001 compared with 0.69% in 2000.
Return on average equity for 2001 was 10.36% compared to 9.09% in 2000.
During 2001, average interest-earning assets increased by 14.1% or
$18,997,355, to $153,654,177. Average interest-bearing liabilities increased
$16,330,109 or 13.2%, to $140,322,418 for the year. The growth in earning
assets was the primary contributor to the increase in interest income. This
increase was partially offset by the decrease in rates received on earning
assets and higher interest expense resulting from the growth in interest bearing
liabilities. Together these netted an increase of $353,299 or 7.2% in fully tax-
equivalent net interest income. The net interest margin declined by 0.22% to
3.41% in 2001. The compression in the net interest margin is due to continued
competition in product pricing and the overall decline in interest rates.
12
Non-interest income during 2001 increased $137,822 or 13.7% compared to
2000. The increase in 2001 resulted primarily from realized gains on sales of
securities of $77,131, increases in service charges on deposits $42,937, and
increased earnings on the cash value of insurance by $18,632. These increases
were partially offset by declines in gains on sales of student loans by $28,713
and a slight decrease in trust department fees of $11,097.
Non-interest expenses during 2001 increased $88,079 or 2.1% over 2000. The
2001 increase was largely a result of increased equipment expenses of $50,163,
higher director and advisory boards compensation of $22,359, increased
professional and regulatory fees by $67,954, higher correspondent bank charges
of $28,554 and increased supplies and postage of $27,311. These increases were
partially offset by a $121,472 decline in employee compensation and benefits,
which was primarily due to an increase in deferred loan origination costs
related to new mortgage loans. The volume of residential loans generated during
2001 was higher than 2000 because of an aggressive marketing plan, general
economic conditions and the lower interest rate environment during the year.
Results of Operations
Net Interest Income and 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 to facilitate comparison with interest earned which
is subject to federal taxation at the statutory tax rate of 34%. 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 by $353,299 or 7.2% to $5,244,457
in 2001 from $4,891,158 in 2000.
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. Following that is the rate and volume analysis table that
shows changes in net interest income attributed to changes in rates and changes
in average balances of interest-earning assets and interest-bearing liabilities.
Table 1
Average Balances, Rates and Interest Income and Expense
2001 2000
Average Interest Yield/ Average Interest Yield/
Balance Rate Balance Rate
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ASSETS
Interest Earning Assets:
Securities
Taxable $ 28,078,258 $ 1,715,005 6.11% $ 25,284,015 $ 1,611,435 6.37%
Tax-exempt 13,118,333 917,644 7.00% 8,952,420 595,997 6.66%
--------------------------------- --------------------------------
Total securities 41,196,591 2,632,649 6.39% 34,236,435 2,207,432 6.45%
Interest earning demand deposits 2,772,744 125,883 4.54% 608,634 39,705 6.52%
Federal funds sold 1,798,545 76,074 4.23% 213,820 12,492 5.84%
Investments in FHLB, ACBB and Federal Reserve stock 908,449 58,254 6.41% 834,949 59,797 7.16%
Loans
Taxable 105,668,243 8,939,116 8.46% 97,435,801 8,439,067 8.66%
Tax-exempt 1,309,605 101,430 7.75% 1,327,183 91,274 6.88%
-------------------------------- --------------------------------
Total loans 106,977,848 9,040,546 8.45% 98,762,984 8,530,341 8.64%
-------------------------------- --------------------------------
Total interest earning assets 153,654,177 11,933,406 7.77% 134,656,822 10,849,767 8.06%
Noninterest earning assets 14,029,860 13,687,532
Total Assets $167,684,037 $148,344,354
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest Bearing Liabilities:
Demand deposits, interest bearing $ 14,723,753 $ 211,392 1.44% $ 13,499,631 $ 195,722 1.45%
Savings deposits 14,136,882 334,179 2.36% 13,802,534 334,221 2.42%
Time deposits 100,776,461 5,558,050 5.52% 86,059,626 4,734,364 5.50%
-------------------------------- --------------------------------
Total interest bearing deposits 129,637,096 6,103,621 4.71% 113,361,791 5,264,307 4.64%
Short term borrowings 2,575,733 107,420 4.17% 4,104,288 286,815 6.99%
Long term borrowings 8,109,589 477,908 5.89% 6,526,230 407,487 6.24%
-------------------------------- --------------------------------
Total interest bearing liabilities 140,322,418 6,688,949 4.77% 123,992,309 5,958,609 4.81%
Demand deposits, noninterest bearing 13,264,874 12,580,468
Other liabilities 1,532,355 535,632
Shareholders' equity 12,564,390 11,235,945
------------ ------------
Total Liabilities and Shareholders' Equity $167,684,037 $148,344,354
============ ============
Net interest income $ 5,244,457 $ 4,891,158
=========== ===========
Interest rate spread 3.00% 3.25%
===== =====
Net interest margin 3.41% 3.63%
===== =====
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 $186,942 in 2001 and $122,965 in 2000.
Table 2
Rate/Volume Analysis
2001 versus 2000
Change Due To
Rate Volume Total
------------------------------------------------------
Interest Earning Assets:
Securities
Taxable $ (67,101) $ 170,671 $ 103,570
Tax-exempt 30,236 291,411 321,647
------------------------------------------------------
Total securities (36,865) 462,082 425,217
Interest bearing demand deposits (12,073) 98,251 86,178
Federal funds sold (3,448) 67,030 63,582
Investments in FHLB, ACBB and Federal Reserve stock (6,256) 4,713 (1,543)
Total loans (184,866) 695,071 510,205
Total (243,508) 1,327,147 1,083,639
------------------------------------------------------
Interest Bearing Liabilities:
Demand deposits, interest bearing (1,905) 17,575 15,670
Savings deposits (7,946) 7,904 (42)
Time deposits 12,019 811,667 823,686
Short term borrowings (115,647) (63,748) (179,395)
Long term borrowings (22,888) 93,309 70,421
------------------------------------------------------
Total (136,367) 866,707 730,340
------------------------------------------------------
Net interest income $(107,141) $ 460,440 $ 353,299
======================================================
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.
The 475 basis points reduction in the Federal Reserve Bank's federal funds
rate and the discount rate during 2001 has resulted in an overall decline in net
interest income due to rate changes totaling $107,141. The reduction in rates
on interest-earning assets resulted in a decline of interest income of $243,508.
The decreased income was partially offset with a reduction in interest expense
on interest-bearing liabilities totaling $136,367.
Tax equivalent interest income increased by $1,083,639 between 2001 and
2000, due to growth in asset volume contributing $1,327,147 in interest income,
partially offset with the reduction resulting from the decline in rates. The
primary components of this increase were the
13
growth in average loans of $8,214,864 positively impacting interest income by
$695,071; however, a decline of 0.19% in the yield on loans lowered interest
income by $184,866. The growth in loans was related to an aggressive marketing
campaign as well as the general economic conditions during the year. Total
average securities grew by $6,960,156 but the corresponding yield decreased
0.06%. The growth in securities increased interest income by $462,082, but the
decline in rates reduced the return by $36,865.
Total interest-bearing liabilities grew by $16,330,109 between 2000 and
2001, increasing interest expense by $866,707 for 2001, which was partially
offset by a lower annualized rate on total interest-bearing liabilities by
0.04%, which decreased interest expense by $136,367. Deposit balances grew, as
a result of depositors looking for a "safe haven" from the stock market, with
growth contributing $837,146 in interest expense. The rates paid on deposits in
2001 remained fairly stable, contributing only $2,168 to the overall increase in
interest expense. In 2001, the Corporation borrowed some additional long-term
money from the Federal Home Loan Bank. Long-term borrowings averaged $8,109,589
for the year, an increase of $1,583,359 over 2000. The increase in long-term
borrowings was offset by a decline in short-term borrowings of $1,528,555 on
average. Declines in rates on borrowings contributed $138,535 to the increase
in net interest income.
The net interest margin is the ratio of net interest income to interest-
earning assets, reflecting a net yield on earning assets. The Corporation's
net interest margin, on a tax equivalent basis, for the years 2001 and 2000 was
3.41% and 3.63%, respectively. The compression in the net interest margin in
2001, compared to 2000, resulted from the overall decline in rates during the
year and continued competition in product pricing. The decrease in yields on
interest-earning assets by 0.29% was not matched by an identical decrease in
rates on interest-bearing liabilities, which declined 0.04%. On average, the
Corporation had 70.5% of its deposits in time deposits during 2001, and these
time deposits were not able to absorb the 475 basis point decrease in market
rates. This compression on the margin is reflected in the spread declining from
3.25% in 2000 to 3.00% in 2001. The monetary impact can also be seen in the rate
change analysis: interest income decrease attributed to rate was $243,508
compared to a decrease in interest expense of $136,367.
Provision for 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 $78,000 provision for loan losses in 2001 as
compared to a provision of $114,000 in 2000. 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 "Allowance for
Loan Losses."
14
Non-Interest Income
Non-interest income of $1,143,188 during 2001 represented an increase of
$137,822 or 13.7% over 2000. Over half of the increase was related to gains on
securities sales of $77,131 during 2001 compared to none in 2000. U.S.
Agencies, which had call dates approaching, were sold in order to reposition the
investment portfolio. The funds were reinvested, primarily in mortgage backed
and state and municipal securities.
Service charges on deposit accounts continued to grow in 2001 with income
of $395,288 compared to $352,351 a year ago, an increase of $42,937 or 12.2%.
The increase is consistent with the growth in deposits during the year and also
reflects an increase in fees collected on checks presented against non-
sufficient funds.
The Corporation's Trust Department continues to grow in size to current
year-end fair value of assets under management totaling $38,549,171 compared to
$36,666,899 in 2000. Income generated by the Trust Department declined slightly
during 2001 to $173,853 from $184,950. The year-end 2000 had a higher volume of
estate settlements than did year-end 2001.
Other fees and charges include commissions on debit and ATM cards and fees
on loans, which increased $19,809 and $16,137, respectively. The total increase
in other fees and charges was $38,932, or 14.3%, over 2000.
Earnings on the cash value of insurance increased $18,632, or 11.3%, to
$182,839 during 2001, partially due to purchases of $585,000 of additional
insurance for new directors. The Corporation is the owner of single premium
life insurance policies on participants in the non-qualified retirement plans
that are maintained for selected employees and directors. At December 31, 2001
and 2000, the cash value of these policies was $3,833,699 and $3,090,522,
respectively.
During 2001, gains on sales of student loans declined by $28,713 to $3,089.
Non-Interest Expense
Non-interest expenses increased $88,079, or 2.1%, in 2001 to $4,364,660
from $4,276,581 in 2000. The increase was primarily related to equipment
expenses and director and advisory board compensation, partially offset by a
decline in employee compensation and benefits.
Salaries and employee benefits decreased $121,472 or 28.5%, in 2001
totaling $2,228,043 down from $2,349,515 in 2000. The decrease was primarily
related to higher deferred loan origination fees because of increased mortgage
volume during 2001, which was related to aggressive marketing and the general
market environment. The number of full time equivalent employees declined from
75 at December 31, 2000 to 68 at December 31, 2001, which was offset by merit
increases.
15
Net occupancy expense increased slightly from $337,745 in 2000 to $345,953
in 2001, primarily as a result of increases in maintenance costs, real estate
taxes and insurance.
Equipment expense reflected an increase of $50,163 or 12.2% in 2001, to
$459,761 compared to $409,598 in 2000. Depreciation expense, which increased
$40,502, was the primary driver of the increase. The increase in depreciation
was related to the addition of internet banking and other data processing
software and equipment towards the end of 2001.
Director and advisory boards compensation increased $22,359, or 12.1%, to
$207,041 primarily as a result of fee increases as well as an increase in the
number of directors.
During 2001, other operating expenses increased $128,821, or 12.9%.
Additional details relating to this category are located in footnote 14 to the
financial statements. Professional and regulatory fees are included in this
category and increased $67,954, or 24.9% to $340,688. During 2001, the
Corporation hired a profit improvement organization at a cost of about $48,000.
Management expects the benefits to be seen through reduced expenses and
increased revenues in the future. Additionally, the Corporation performed a
market study during 2001, which also contributed to the increase in professional
and regulatory fees. Correspondent bank charges increased $28,554, or 18.6% to
$153,234 primarily as a result of reduced earnings credits with interest rates
being down during the year. Supplies and postage increased $27,311, or 17.5%.
State shares tax, telephone and other communications and other increased
slightly to $417,861 during 2001 from $413,859 during 2000.
Income Taxes
Income tax expense was $297,000 for 2001 compared to $251,000 for 2000.
Income tax expense as a percentage of income before income taxes was 18.6% for
2001 and 19.7% for 2000. See the table below for a reconciliation between the
statutory rate and the actual percentage of income tax expense to income before
income taxes:
2001 2000
------------------------------- ---------------------------
Amount Percent Amount Percent
------------------------------- ---------------------------
Statutory rate $ 543,490 34.0% $ 432,572 34.0%
Effect of:
Tax-exempt securities (170,536) (10.7)% (109,464) (8.6)%
Tax-exempt loans (18,850) (1.2)% (16,758) (1.3%)
Cash value of insurance (53,848) (3.4)% (48,209) (3.8%)
Other items (3,256) (0.1)% (7,141) (0.6%)
------------------------------- ---------------------------
Effective tax rate $ 297,000 18.6% $ 251,000 19.7%
=============================== ===========================
16
The decrease in 2001 and 2000 in the Corporation's effective tax rate from
the statutory rate of 34% is a result of a percentage of income being derived
from tax-exempt investments and loans and tax-exempt income earned on life
insurance investments.
Refer to Note 16 to the 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. There have been no transfers of securities
from available-for-sale to held-to-maturity, nor were there any securities sold.
The Corporation generally intends to hold its investment portfolio until
maturity; however about 65%, or $30,792,377, of total securities at December 31,
2001 were classified as available-for-sale. Net unrealized gains at year-end
2001 of $799,329 represented an increase of $291,562 since year-end 2000, which
is reflected as accumulated other comprehensive income of $492,093 in
stockholders' equity, net of deferred income taxes. The accumulated other
comprehensive income net of taxes at December 31, 2000 totaled $307,260.
The held-to-maturity securities totaled $16,350,045 at December 31, 2001
compared to $14,687,200 a year ago. These securities had a fair value of
slightly less than amortized cost at year-end 2001. The decline is not
anticipated to be other than temporary.
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:
Table 3
Investment Securities
2001 2000
Available-for-sale securities at fair value
U.S. Treasury $ 1,013,344 $ 1,613,665
U.S. Agencies 2,461,597 9,814,040
Mortgage backed securities 26,444,736 7,231,170
Stock in other banks 872,700 702,071
Total Available-for-sale 30,792,377 19,360,946
-------------------------------
Held-to-maturity securities at amortized cost
U.S. Treasury 399,888 2,798,781
U.S. Agencies - 513,776
State and municipal 14,386,325 9,224,389
Mortgage backed securities 1,563,832 2,150,257
Total Held-to-maturity 16,350,045 14,687,203
-------------------------------
Total Securities $47,142,422 $34,048,149
===============================
Securities Maturity Schedule Less than 1 Year 1-5 Years 5-10 Years Over 10 Years or no
Maturity
Amount Yield Amount Yield Amount Yield Amount Yield
------------------------------------------------------------------------------------------------------
U.S. Treasury $ 1,413,232 6.52% $ - 0.00% $ - 0.00% $ -
U.S. Agencies - 0.00% 2,249,305 5.83% 212,292 7.50% -
State and municipal 1,379,907 5.69% 4,547,652 6.27% 1,341,915 6.40% 7,116,851 7.02%
Mortgage backed securities - 0.00% - 0.00% - 0.00% 28,008,568 5.91%
Total $ 2,793,139 6.11% $6,796,957 6.12% $1,554,207 6.55% $35,125,419 6.13%
======================================================================================================
Securities Maturity Schedule Total
Amount Yield
------------------------
U.S. Treasury $ 1,413,232 6.52%
U.S. Agencies 2,461,597 5.97%
State and municipal 14,386,325 6.60%
Mortgage backed securities 28,008,568 5.91%
Total $46,269,722 6.15%
========================
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%.
At year-end 2001, securities totaled $47,142,422, including $799,329 in net
unrealized gains on available-for-sale securities. Comparatively, securities
totaled $34,048,149 at year-end 2000, including $507,767 in net unrealized
gains. At year-end 2001, 59.4% of the portfolio was held in mortgage-backed
securities and 30.5% was held in state and municipal securities. There is no
issuer of securities in which the aggregate book or fair value of that issuer,
other than the securities of the U.S. Treasury and Agencies, exceeds 10% of
shareholders' equity.
17
Loans
The loan portfolio comprises the major portion of the Corporation's earning
assets as of December 31, 2001. Loans, net of unearned income, at year-end 2001
were $115,834,767, an increase of $14,858,572, or 14.7%, from year-end 2000.
The increase in loans outstanding was primarily in residential real estate and
commercial real estate, which grew by $7,814,974, or 14.7%, and $4,239,764, or
25.8%, respectively.
The following tables set forth information on the composition of the
Corporation's total loans, and contractual maturities for commercial and
construction loans as of the dates indicated:
Table 4
Total Loans Outstanding
2001 2000
Commercial, financial and agricultural $ 10,891,102 $ 10,717,780
Real estate - commercial 19,528,620 15,620,976
Real estate - construction 105,000 -
Real estate - residential 80,261,590 68,931,168
Installment 5,322,510 5,952,758
-----------------------------
Total 116,108,822 101,222,682
Less: unearned income (274,055) (246,487)
Less: allowance for loan losses (1,037,998) (966,441)
Net Loans $114,796,769 $100,009,754
=============================
Loan Maturities - Commercial and Construction Loans
Less than 1 Year 1-5 Years Over 5 Years Total
-------------------------------------------------------------
Commerical, financial and agricultural $ 5,163,563 $ 4,342,538 $ 1,385,001 $10,891,102
Real estate - commercial 666,876 1,747,829 17,113,915 19,528,620
Real estate - construction 105,000 - - 105,000
Total $ 5,935,439 $ 6,090,367 $18,498,916 $30,524,722
=============================================================
Loans with a fixed interest rate $ 1,570,636 $ 5,570,593 $ 4,378,816 $11,520,045
Loans with a variable interest rate 4,364,803 519,774 14,120,100 19,004,677
Total $ 5,935,439 $ 6,090,367 $18,498,916 $30,524,722
=============================================================
Scheduled repayments for the maturity category in which the payment is due
are not reflected because such information is not readily available.
The composition of the loan portfolio, at year end 2001, was approximately
69.1% residential real estate, 4.6% installment, 16.8% commercial real estate,
9.4% commercial, financial and agricultural, and 0.1% real estate construction
loans.
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.
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 econcomic conditions
and collection efforts. Loans are returned to accrual status only when all
factors indicating doubtful collectibility 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, 2001 and 2000, the Corporation had no troubled debt restructurings.
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:
Table 5
Non-Performing Assets
2001 2000
Non-accrual loans $ 746,572 $ 52,572
Accruing loans 90 days past due - 132,730
Total Non-Performing Loans 746,572 185,302
-----------------------------
Foreclosed real estate 59,909 4,445
Total Non-Performing Assets $ 806,481 $ 189,747
=============================
Ratios:
Non-performing loans to total loans 0.64% 0.18%
Non-performing assets to total loans and foreclosed real estate 0.69% 0.19%
Allowance for loan losses to non-performing loans 139.04% 521.55%
Non-accrual Loans:
Interest income that would have been recorded under original terms 82,689 5,886
Interest income recorded during the year 56,007 3,692
There were no troubled debt restructurings for 2001 or 2000. Additionally,
there were no potential problem loans that were not included above.
Total non-performing assets at year end 2001 were $806,481, an increase of
$616,734 or 30.8% since the beginning of the year. Total non-performing loans to
total loans at year-end
18
2001 was 0.64% and was 0.18% at year-end 2000. The increase in non-performing
loans during 2001 was primarily related to two substantial commercial borrowers.
The Corporation held $59,909 in other foreclosed real estate at year-end
2001, which consisted of a single family residence. The Corporation held
minimal foreclosed real estate at year-end 2000.
Allowance for Loan Losses
The allowance for loan losses is maintained through a provision for loan
losses charged to operations. In management's judgment, the allowance
represents an adequate amount to absorb reasonably foreseeable losses on
existing loans and commitments. Management's judgment is based on changes in
the nature and volume of the loan portfolio, current economic conditions,
historical loan loss experience, collateral value, financial strength of the
borrowers and other relevant factors.
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.
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:
Table 6
Analysis of Allowance for Loan Losses
2001 2000 1999
Beginning Balance $ 966,441 $863,104 $771,459
Provision for Loan Losses 78,000 114,000 102,000
Loans charged-off:
Commercial, financial and agricultural - - 5,000
Real estate - construction - - -
Real estate - mortgage - - -
Installment 18,033 14,830 13,496
Total Charged-off 18,033 14,830 18,496
-----------------------------------
Recoveries:
Commercial, financial and agricultural 6,000 - -
Real estate - construction - - -
Real estate - mortgage - - -
Installment 5,590 4,167 8,141
Total Recoveries 11,590 4,167 8,141
-----------------------------------
Net Charge-offs 6,443 10,663 10,355
Ending Balance $ 1,037,998 $966,441 $863,104
===================================
Ratios:
Net charge-offs to average loans 0.01% 0.01% 0.01%
Allowance for loan losses to total loans 0.89% 0.95% 0.90%
Allocation of the Allowance for Loan Losses
2001 2000 1999
Amount Percent of Amount Percent of Amount Percent of
Loan Type to Loan Type to Loan Type to
Total Loans Total Loans Total Loans
-----------------------------------------------------------------------------
Commercial, financial and agricultural $ 171,657 9.38% $ 138,575 10.59% $ 207,659 3.63%
Real estate - construction 315 0.09% - 0.00% - 0.00%
Real estate - mortgage 432,155 85.95% 274,107 83.53% 230,844 87.68%
Installment 17,867 4.58% 44,924 5.88% 121,546 8.69%
Unallocated 416,004 n/a 508,835 n/a 303,055 n/a
-------------------------------------------------------------------------
Total $ 1,037,998 100.00% $ 966,441 100.00% $ 863,104 100.00%
=========================================================================
At December 31, 2001, the allowance for loan losses to total loans was
0.89% compared to 0.95% at year-end 2000. See the "Provision for Loan Losses"
for information on the additions to the allowance. Net charge-offs, which also
effect the allowance, totaled $6,443 in 2001, $10,663 in 2000 and $10,355 in
1999. The percent of net charge-offs to average loans was 0.01% in 2001, 2000
and 1999.
At the end of 1998, a conscious effort was made to identify problem loans,
which to that point had been increasing. By December 31, 1999, classified and
criticized loans were at an historic high and extra effort was placed on credit
quality. Loan growth during the year continued to be strong and the monthly
provisions to the loan loss reserve were increased.
Efforts toward credit quality were rewarded during 2000, as several
material criticized credits were paid off or exited, resulting in a lower
allocation to specific credits. Commercial and agricultural loan activity was
targeted during 2000, as reflected in the portfolio increase from 3.64% to
10.59%. Reasonable contributions to the reserve were continued to support the
growth in this typically higher risk lending portfolio. Interest rates in 2000
resulted in a lower rate of growth in all lending categories. The combined
effect of a slower rate of growth, continued feeding of the reserve and a
reduction in criticized loans resulted in a temporary increase in unallocated
reserves.
19
During 2001, criticized and substandard loan began to return to more normal
levels. Provisions to the loan loss reserve continued as loan demand increased
substantially over the previous two fiscal years. Unallocated reserves
decreased 18%, primarily as a result of the growth in the portfolio. At
December 31, 2001, there was a modest increase in substandard loans compared to
2000, which was attributed to the slowing economy.
Management believes the allowance for loan losses at December 31, 2001 and
2000 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 Generally
Accepted Accounting Principles, there can be no assurance that the Office of the
Comptroller of the Currency or the Board of Governors of the Federal Reserve
System, 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, 2001, deposits totaled $154,022,012, up
$22,328,292, or 17.0%, from year-end 2000. Time deposits contributed most of
the growth with a $17,351,927, or 19.2%, increase. Savings deposits and demand
deposits followed with growth of $2,593,685 and $2,382,680, respectively. The
growth in time deposits was related to investors looking for a "safe haven" from
the stock market. The Bank has a time deposit, which can be repriced, subject
to certain restrictions, without a penalty. Some investors are using this
account instead of a money market account.
The following table sets forth information on time deposits of $100,000 or
more as of the dates indicated:
Table 7
Time Deposits of $100,000 or More Maturity Schedule
2001
Three months or less $ 6,595,000
Over three and through six months 12,018,000
Over six and through twelve months 4,545,000
Over twelve months 2,324,012
---------------
Total $ 25,482,012
===============
Large dollar certificates of $100,000 or more, are generally considered
more volatile than other deposits. The Corporation's large dollar certificates
and individual retirement accounts (IRAs) totaled $25,482,012 at year-end 2001,
reflecting an increase of $5,037,985 over year-end 2000.
20
Borrowings
Short-term borrowings at December 31, 2001 included overnight borrowings of
$1,800,000, securities sold under agreements to repurchase of $4,264,426 and a
treasury tax and loan note for $18,436. The corporation had no overnight
borrowings at December 31, 2000, $3,152,219 of securities sold under agreements
to repurchase, and a treasury tax and loan note for $100,000.
Additional information on the overnight borrowings and securities sold
under agreements to repurchase is located in footnote 12 of the annual report
and table 1 on page 13.
Long-term borrowings increased $1,000,000 during 2001 as a $1,000,000
borrowing at 6.75% matured in May 2001 and the Corporation obtained two new
borrowings at $1,000,000 each. Both of the borrowings are convertible and have
rates of $4.98% and 3.94%, respectively.
Interest Rate Sensitivity
The operations of the Corporation do not subject it to foreign currency
risk or commodity price risk. The Corporation does not utilize interest rate
swaps, caps or hedging transactions. In addition, the Corporation has no market
risk sensitive instruments entered into for trading purposes. However, the
Corporation is subject to interest rate risk and employs several different
methods to manage and monitor the risk.
Rate sensitive assets and rate sensitive liabilities are those whose rates
or yields are subject to change within a defined time period, due to maturity or
a floating market rate. The risk to the Corporation results from interest rate
fluctuations to the extent that there is a difference between the amount of the
Corporation's rate sensitive assets and the amount of interest sensitive
liabilities within specified periods. The Corporation monitors its rate
sensitivity in order to reduce its vulnerability to interest rate fluctuations
while maintaining adequate capital and acceptable levels of liquidity. The
Corporation's asset and liability policy, along with monthly financial reports
and quarterly financial simulations, supplies management with guidelines to
evaluate and manage the Corporation's rate sensitivity.
Gap analysis is one method used to monitor the imbalance between repricing
or maturing assets and liabilities within a defined time frame in relation to
total assets. When the gap is positive, with interest rate sensitive assets
repricing faster than rate sensitive liabilities, net interest income usually
improves if interest rates increase. The opposite occurs in the case of a
negative gap. Intentional mismatching can improve the net interest margin if
interest rates move as predicted. However, the net interest margin may suffer,
if rates move contrary to predictions.
The following table sets forth the Corporation's interest sensitivity
analysis as of the date indicated:
Table 8
Interest Rate Sensitivity Analysis December 31,
2001 3 Months 6 Months 1 Year
Under Three through 6 through 1 through 5 Over 5
Months Months Year years years
-------------------------------------------------------------
ASSETS
Interest Earning Assets:
Securities $ 5,194 $ 3,722 $ 9,965 $19,776 $ 7,686
Interest earning demand deposits - - - - -
Federal funds sold 728 - - - -
Investments in FHLB, ACBB and Federal Reserve stock 922 - - - -
Loans 19,817 15,855 23,855 52,394 4,188
Total Interest-Earning Assets $ 26,661 $ 19,577 $ 33,820 $72,170 $ 11,874
-------------------------------------------------------------
LIABILITIES:
Demand deposits, interest bearing $ 774 $ - $ - $ 1,545 $ 13,151
Savings deposits 761 - - 1,526 12,976
Time deposits 27,355 31,113 18,966 30,411 -
Short term borrowings 6,082 - - - -
Long term borrowings 6,000 200 1,000 1,000 -
Total Interest-Bearing Liabilities $ 40,972 $ 31,313 $ 19,966 $34,482 $ 26,127
--------------------------------------------------------------
Interest sensitivity gap $(14,311) $(11,736) $ 13,854 $37,688 $(14,253)
--------------------------------------------------------------
Cumulative sensitivity gap $(14,311) $(26,047) $(12,193) $25,495 $ 11,242
--------------------------------------------------------------
As of December 31, 2000
Interest sensitivity gap $ (3,911) $ (5,769) $ (5,376) $41,339 $(14,774)
--------------------------------------------------------------
Cumulative sensitivity gap $ (3,911) $ (9,680) $(15,056) $26,283 $ 11,509
--------------------------------------------------------------
21
The Interest Sensitivity Analysis includes certain assumptions on the re-
pricing of interest-bearing and savings deposits. Generally, these accounts are
less sensitive to interest rate changes and are part of the Corporation's core
deposits. As a result, management has estimated that 5% of money market
accounts are the most interest rate sensitive, thereby placing them in the
"Under 3 Month" category, placing an additional 10% of savings in the "1 Year
through 5 Years" category and placing the remainder in the "Over 5 Years"
category.
As indicated in the Interest Sensitivity Analysis for December 31, 2001,
the Corporation's cumulative one year gap was a negative $12,193,000, which
means liabilities will reprice faster than assets. This generally means that
net interest income will decrease in an upward moving rate environment and will
increase in a downward moving rate environment.
Financial simulation is another tool to monitor interest rate risk.
Simulation presents a picture of the effect interest rate changes have on net
interest income. Assumptions and estimates are used in the preparation of the
simulation and actual values may differ from those presented. In addition,
these simulations do not portray other actions management might take to changes
in market rates. The following is an analysis of possible changes in The
Corporation's net interest income, for a +/- 200 basis point rate shock over a
one year period compared to a flat or unchanged rate scenario.
2001 2000
Change in interest rates Percent Change Percent Change
+ 200 basis points 0.94% (3.36)%
Flat rate 0.00% 0.00%
- - 200 basis points (0.64)% 0.06%
The percent change is expressed as the change in net interest income as a
percent of the base years net interest income. The net interest income at risk
position is within the guidelines set by The Corporation's asset/liability
policy. An increase of 200 basis points could result in a 0.94% increase in net
interest income, whereas, a 200 basis point decrease could result in a 0.64%
decline in net interest income.
Liquidity and 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 core deposit base
and a strong capital position. The stability of the core deposits is reflected
in a comparison of year-end balances to yearly averages. Core deposits at year-
end 2001 totaled $154,022,012 and averaged $142,901,970 for the year, this is
consistent with the increase in deposits for the year. Likewise, year end 2000
core deposits totaled $131,693,720 and averaged $125,942,259 for the year.
22
Other sources of liquidity are available from investments securities
maturing in one year or less, which totaled $2,779,400 at year-end 2001 and from
investments in mortgage-backed securities, which supply income and principal
cash flow streams on an ongoing basis. Mortgage-backed securities represented
60.1% of the total amortized cost of securities as of December 31, 2001. These
sources provide the Corporation with adequate resources to meet its short-term
liquidity requirements. Longer term liquidity needs might be met by selling
securities available-for-sale, which had a fair value of $30,792,377 at December
31, 2001, 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 exceeded $85,000,000 at December 31, 2001, of
which $75,000,000 or 88.2% was available.
The Corporation's loan to deposit ratio, for 2001, was maintained at an
average of 74.9% and ended the year at 75.2% compared to an average of 78.4% in
2000, ending the year at 76.7%.
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, 2001 totaled $13,970,000 and standby letters of
credit totaled $104,000. 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. Standby letters of credit
are conditional commitments issued by the Corporation to guarantee performance
of a customer to a third party. These guarantees are generally issued to
support public and private borrowing arrangements and similar transactions. The
Corporation has no investment in or financial relationship with any
unconsolidated entities that are reasonably likely to have a material effect on
liquidity or the availability of capital resources.
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 growth in earnings. The dividend payout
ratio was 27.42% in 2001, compared to 31.76% in 2001. Shareholders' equity at
the end of 2001 totaled $13,059,469, an increase of $1,129,333 or 9.5% over
year-end 2000. The increase was a result of net income supplemented with a
$184,833 unrealized gain on securities available-for- sale, net of taxes, and
reduced by the dividend payout of $357,000. Likewise, shareholders' equity at
the end of 2000 totaled $11,930,136, an increase of $1,121,080 or 10.4% over
year-end 1999. The increase was a result of net income supplemented with a
$369,209 unrealized gain on securities available-for-sale, net of taxes, and
$55,000 in net treasury stock transactions, which represented the difference in
the
23
market price from the repurchase date in January 2000 until the reissuance date
in April 2000. The increases were reduced by the dividend payout of $324,400.
The table in footnote 19 to the financial statements sets forth the
Corporation's capital ratios as of December 31, 2001 and 2000.
The Corporation had a leverage ratio of 6.90%, a Tier I capital to risk-
based assets of 12.48%, and a Total capital to risk-based assets of 13.52% at
year-end 2001. These ratios show that the Corporation exceeds the federal
regulatory minimum requirements for a "well capitalized bank." The Bank was also
considered to be "well capitalized" as of December 31, 2001. The minimum
regulatory requirements of a "well capitalized bank" for the leverage ratio,
Tier I and total risk-based capital ratios are 5.00%, 6.00% and 10.00%,
respectively.
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.
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.
ITEM 3 DESCRIPTION OF PROPERTY
The Bank owns its main office located at Two North Main Street in
Mifflintown, Pennsylvania and the following branch offices:
Tuscarora Valley Branch
Route 75 & "Old" U.S. Route 22/322
Walker Township, Juniata County, Pennsylvania
Fermanagh Branch
Pa. Route 35 & U.S. Route 22/322
Fermanagh Township, Juniata County, Pennsylvania
24
Loysville Branch
Pa. Route 850 & Pa. Route 274
Loysville, Perry County, Pennsylvania
New Bloomfield Branch
Route 274 West & Cold Storage Road
Center Township, Perry County, Pennsylvania
West Perry Branch
Route 74 & Route 274
Spring and Tyrone Townships, Perry County, Pennsylvania
Ickesburg Branch
Route 17 West
Ickesburg, Perry County, Pennsylvania
The Bank leases the building space occupied by its Delaware branch
office located on Pa. Route 333 in Delaware Township, Juniata County. The
lease's original term of ten years expired on November 21, 1999, and the Bank
executed a revised lease that shall expire on March 31, 2009.
The Bank also leases the land where it constructed its East Waterford
branch office, located on North Main Street in Tuscarora Township, Juniata
County. The initial term of this lease expires June 18, 2009. Upon expiration
of the initial term, the Bank may extend the lease for three successive renewal
periods of five years each.
Beginning February 28, 2002, the Bank also leases the space occupied
by the Shermans Dale Branch, located at the intersection of Pa. Route 850 and
Pa. Route 34 in Caroll Township. The initial term of this lease expires
February 28, 2003. Upon expiration of the initial term, the Bank has the option
to renew the lease for five additional one year terms.
Each of the Bank's ten banking offices is a full service office. Each
of the nine branch offices provides drive-through teller and, except at the
Ickesburg branch, automated teller machine services.
25
ITEM 4 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of December 31, 2001
regarding the beneficial owners of more than 5% of the Corporation's Common
Stock known to the Corporation.
Shares Beneficially Owned
Name and Address ------------------------- Percentage of
of Beneficial Owner Direct Indirect Class (b)
- ---------------------- ------ -------- ---------
JMD Partners L.P. 71,152 -- 10.16%
6030 Tamilynn Street
San Diego, CA 92112
Frank L. Wright --- 50,000(a) 7.14%
4110 McIntosh Road
Harrisburg, PA 17112
- --------------------------------------------------------------------------------
(a) Shares held by "FMB, Trustee for Frank L. Wright Money Purchase Pension
Plan."
(b) Percentage shown assumes 700,000 shares issued and outstanding.
The following table sets forth information as of December 31, 2001,
regarding ownership of Common Stock of the Corporation by (i) the directors and
the chief executive officer of the Company individually; and (ii) all executive
officers and directors of the Company as a group. Unless otherwise specified,
all persons listed below have sole voting and investment power with respect to
their shares.
Shares Beneficially Owned
Name and Address ------------------------- Percentage of
of Beneficial Owner Direct Indirect Class (c)
- ---------------------- ------ -------- ---------
Joseph E. Barnes, Sr. 3,380 --- ---
R.R. #1, Box 255A
Thompsontown, PA 17044
Nancy S. Bratton 3,445 --- ---
2356 Raccoon Valley Road
Millerstown, PA 17062
John P. Henry 1,830 --- ---
RR2, Box 1310
Port Royal, PA 17082
26
Shares Beneficially Owned
Name and Address ------------------------- Percentage of
of Beneficial Owner Direct Indirect Class (c)
- ---------------------- ------- --------- ---------
Samuel G. Kint 11,700 --- 1.67%
RR4, Box 252
Mifflintown, PA 17059
James R. McLaughlin 9,000 --- 1.29%
R.D. #2, Box 480
Port Royal, PA 17082
Clair E. McMillen 3,328 --- ---
R.R. #1, Box 134
Loysville, PA 17047
Samuel F. Metz 18,100 400 (a) 2.64%
R.D. # 4, Box 114
Mifflintown, PA 17059
Chares C. Saner 1,300 --- ---
R.R. #1, Box 199
Thompsontown, PA 17094
Roger Shallenberger 12,250 12,250 (a) 3.50%
R.D. #1, Box 748
McAllisterville, PA 17049
Lowell M. Shearer 21,800 40 (a) 3.12%
R.R. #3, Box 360
Mifflintown, PA 17059
John A. Tetwiler 1,700 --- ---
R.R. #2, Box 455
Port Royal, PA 17082
Frank L. Wright 50,000 (b) 7.14%
4110 McIntosh Road
Harrisburg, PA 17112
All Executive Officers and 88,833 62,690 21.65%
Directors as a Group
(15 persons)
- --------------------------------------------------------------------------------
(a) Shares held in name of spouse.
(b) Shares held by "FMB, Trustee for Frank L. Wright Money Purchase Pension
Plan."
(c) Percentage assumes 700,000 shares issued and outstanding. Less than 1%
unless otherwise noted.
27
ITEM 5 DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL PERSONS
The following table sets forth information about executive officers
and directors of the Corporation and the Bank. The Corporation's directors are
also directors of the Bank. In accordance with the Bylaws of the Corporation,
the Board is divided into three classes, each serving staggered three-year
terms. Their terms expire at the annual meeting in the year shown.
Position with Corporation (other than as
Director), if any, Present Principal
Director Term Occupation and Principal Occupation for
Name Age Since Expires Past Five Years
- ---- --- ---- ------- ----------------------------------------------------------------
Marcie A. Barber 43 -- -- Senior Vice President and Credit Services Division Manager of
the Corporation and the Bank since 1998; previously a Vice
President for Commercial Lending at Mellon Bank
Joseph E. Barnes, Sr. 65 1992 2002 Director/Operator of Barnes Body Shop
Nancy S. Bratton(b) 60 2001 2002 Owner, Bratton Insurance Agency
John P. Henry(b) 48 2001 2004 Vice President, PHE Mechanical Systems, Inc. (b)
Samuel G. Kint 62 2001 2003 Retired businessman
Richard R. Leitzel 46 -- -- Vice President and Chief Financial Officer of the Corporation
and the Bank since 1999; previously, an independent financial
consultant to financial institutions
James R. McLaughlin(c) 61 1980(a) 2004 President and Chief Executive Officer of the Corporation and the
Bank
Clair E. McMillen 67 1996 2003 Partner, McMillen Bros., distributor of agricultural equipment
and Sales Representative for Badger Farm Equipment
Samuel F. Metz(c) 84 1959(a) 2002 Chairman of the Board of Corporation and the Bank; Retired
Assistant School Superintendent
Charles C. Saner(b) 57 1997 2002 Dairy Farmer
Roger Shallenberger (c) 54 1988 2003 Vice Chairman of Corporation and the Bank; Former owner and
President of KSM Enterprises, Inc., manufacturer of log homes
28
Position with Corporation (other than as
Director), if any, Present Principal
Director Term Occupation and Principal Occupation for
Name Age Since Expires Past Five Years
- ---- --- ------- ------- ---------------------------------------
Lowell M. Shearer(b)(c) 55 1997 2003 Self-employed, timber hauler
Timothy P. Stayer 49 -- -- Vice President and Community Banking
Services Division Manager of the
Corporation and the Bank
John A. Tetwiler(b) 71 1994 2004 Retired Appliance and Lawn and Garden
Equipment Store owner
Frank L. Wright 61 1993 2004 Attorney
- --------------------------------------------------------------------------------
(a) Includes period prior to April 1985 when named person served as Director of
the Bank prior to its becoming a wholly-owned subsidiary of the
Corporation.
(b) Member of the Audit-Compliance Committee of the Bank.
(c) Member of the Executive Committee of the Bank.
No officer or director of the Corporation or the Bank has been the
subject of any order, judgment or decree, not subsequently revised, suspended or
vacated, of any court or federal or state authority permanently or temporarily
enjoining him from, barring, suspending or otherwise limiting the right of such
person to engage in securities activities.
ITEM 6 EXECUTIVE COMPENSATION
The following table sets forth the executive compensation of the
Corporation's named executive officer for each of the last three years. No other
forms of compensation, stock options or stock awards are provided to the named
executive officer. There are no other executive officers of the Corporation or
the Bank whose salary and bonus exceeded $100,000.
Summary Compensation Table
Annual Compensation
-------------------
Name and Other Annual All Other
Principal Position Year Salary(1) Bonus Compensation Compensation (2)
- ------------------ ---- --------- ----- ------------ ----------------
James R. McLaughlin 2001 $112,164 $3,116 - $ 30,023
President and Chief
Executive Officer; 2000 $103,855 $2,907 - $ 31,112
Director
1999 $ 98,900 $2,501 - $ 30,764
29
- --------------------------------------------------------------------------------
(1) Does not include directors fees.
(2) Includes for 2001, 2000 and 1999, respectively, the following compensation
amounts: (i) 401(k) plan matching and discretionary contributions, $6,544,
$6,231and $5,935; (ii) the present value of the economic benefit to the
executive from premiums paid by the Corporation to purchase split dollar life
insurance contract under a salary continuation plan, $22,995, $24,457 and
$24,457; and (iii) the amount of premiums paid by the Corporation for death
benefit in excess of $50,000 under the Corporation's group term life replacement
plan, $484, $424 and $372.
The Bank maintains a 401(k) plan for the benefit of eligible
employees. Employer contributions include a matching of a portion of employee
contributions and a discretionary contribution determined each year by the Board
of Directors. The Bank's contribution on behalf of all of the participants may
not be in excess of the maximum amount deductible for tax purposes under Section
404(a) of the Internal Revenue Code of 1986, as amended. In general, this amount
cannot be more than fifteen percent (15%) of the compensation otherwise paid
during the taxable year to all employees under the profit sharing plan.
The Bank has entered into Salary Continuation Agreements with six of
its senior officers, including Mr. McLaughlin, in order to provide them with
supplemental retirement income. In the case of Mr. McLaughlin, the retirement
benefit is fixed at $29,000 for the first year and increases thereafter at a
rate of 3.50% per year and is paid for a term of fifteen (15) years. Vesting in
the benefits of the salary continuation plans is determined within the
discretion of the Board of Directors. An intended purpose of the plans is to
provide an incentive to such persons to continue in the employ of the Bank.
Also in 1997, the Bank's Board of Directors established an Officer
Group Term Replacement Plan for the benefit of Mr. McLaughlin, Marcie A. Barber,
Richard A. Leitzel and Leona Shellenberger (retired Treasurer of the Bank). This
Plan provides participating officers with a life insurance benefit equal to two
times current salary, but not in excess of a certain predetermined amount. Thus,
for example, Mr. McLaughlin's benefit is capped at $224,000.
The Bank has also entered into Director Deferred Fee Agreements with
six directors, established a Director Revenue Neutral Retirement Program in
which ten directors have elected to participate and established a Directors
Split Dollar Program in which nine directors have elected to participate. The
purpose of each of these programs or plans is to make certain retirement
benefits available to the directors who participate.
Each director receives $575 per month for each meeting attended and
each non-employee director is paid $125 for each committee meeting attended.
Total fees paid in 2001 to directors of the Corporation and the Bank were
$92,360.
30
ITEM 7 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Bank has had, and expects to have in the future, loan and other
banking transactions in the ordinary course of business with its directors,
officers and their associates. All extensions of credit to such persons have
been made in the ordinary course of business on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with other persons, and in the opinion of the management
of the Bank, do not involve more than a normal risk of collectibility or present
other unfavorable features. All loans to directors or executive officers of the
Corporation or the Bank require the approval of the Board of Directors except
for the individual requesting such loan who is prohibited from attending the
discussion or participating in the vote on such loan. During 2001, $577,000 of
new loans were made to such persons and repayments totaled $377,000. As of
December 31, 2001, directors and officers were indebted to the Bank for loans
totaling $780,000.
ITEM 8 DESCRIPTION OF SECURITIES
The following summary description of the Corporation's capital stock
is qualified in its entirety by reference to the Corporation's Articles of
Incorporation and Bylaws, each as amended.
Common Stock.
The Corporation is authorized to issue 10,000,000 shares of common stock,
par value $5.00 per share. There are 700,000 shares of common stock issued and
outstanding. The remaining 9,300,000 authorized but unissued shares of common
stock may be issued by the Board of Directors without further shareholder
approval. Issuance of such shares could cause a dilution of the book value per
share of the stock and the voting power of present shareholders.
Voting Rights.
Shareholders are entitled to one vote per share on all matters presented to
them and do not have cumulative voting rights in the election of directors.
Preemptive Rights.
Corporation common stock has no subscription, conversion or preemptive
rights.
Liquidation Rights.
Each share of common stock is entitled, upon the liquidation, dissolution
or winding up of the affairs of the Corporation, to share ratably in the assets
legally available for distribution to shareholders.
31
Dividends.
Each share of common stock is entitled to share pro rata in dividends. The
Corporation is permitted by the Pennsylvania Business Corporation Law of 1988,
as amended (the "BCL"), to pay dividends provided that, after giving effect to
the dividend: (i) it would be able to pay its debts as they come due in the
usual course of its business, and (ii) its total assets would exceed the sum of
its total liabilities and the amount that would be needed, if any, to satisfy
any preferential rights of shareholders to receive a preferential distribution
upon the dissolution. Currently, there are no material legal restrictions on
the payment of dividends by the Corporation.
The Corporation's primary source of dividends is the retained earnings of
the Bank available for transfer to the Corporation in the form of dividends from
the Bank. Under the National Bank Act, the dividends that may be paid by the
Bank without prior regulatory approval are subject to certain prescribed
limitations. The prior approval of the OCC would be required if the total of
all dividends declared by the Bank in any calendar year would exceed net
profits, as defined in the National Bank Act, for the two preceding calendar
years. The OCC also has the authority to prohibit dividend payments by banks to
the extent that payment of dividends is determined by the OCC to constitute
"unsafe or unsound banking practices" or if banks are in arrears in payment of
insurance assessments due to the FDIC. Compliance with standards for capital
adequacy established by federal banking authorities also can restrict the
ability of banks to pay dividends.
Anti-Takeover Provisions.
Under the BCL and the Articles of Incorporation and Bylaws of the
Corporation, there are a number of provisions applicable to the Corporation that
may be deemed to be "anti-takeover" in nature. The BCL also contains a number
of other so-called "anti-takeover" provisions that are applicable to the
Corporations by reason of its common stock being registered under Section 12 of
the Securities Exchange Act of 1934. The cumulative effect of these provisions
may be to deter or discourage a transaction or acquisition of shares that is not
negotiated in advance with the Board of Directors.
The Articles of Incorporation provide for 10,000,000 authorized shares of
common stock which do not provide preemptive rights to shareholders to subscribe
to purchase additional shares of stock on a pro rata basis. The additional
shares of common stock and the elimination of preemptive rights to such stock
were authorized for the purpose of providing the Board of Directors with as much
flexibility as possible to issue additional shares, without further shareholder
approval, for proper corporate purposes, including providing additional capital
to support our operations, financing acquisitions, stock dividends, stock
splits, employee incentive plans and other similar purposes. These additional
shares also may be used by the Board of Directors to deter future attempts to
gain control over the Corporation.
The Corporation is also authorized to issue 10,000,000 shares of preferred
stock, no par value, of which none are issued and outstanding. The Board of
Directors has the power, without further shareholder approval, to issue the
authorized preferred stock in series and to determine the
32
voting powers, if any, dividend rates, conversion or redemption rights,
designations, rights, preferences and limitations of the shares in each series.
The Board of Directors will determine these matters with respect to the
preferred shares only when they are issued. The ability of the Board of
Directors, without further shareholder approval, to issue preferred stock and to
determine the terms thereof prior to issuance, may have the effect of
discouraging a non-negotiated business combination involving the Corporation
because a potential acquiror of Corporation common stock may be concerned with
the potential dilutive effects of any such issuance of preferred stock on such
acquirors equity interest and voting power.
The Corporation's Bylaws provide for a classified Board of Directors
pursuant to which Directors are elected for staggered terms. The Board of
Directors believes that a classified Board will help to assure the continuity
and stability of corporate leadership and policy. In addition, a classified
board helps to moderate the pace of any change in control of the Board of
Directors by extending the time required to elect a majority of the directors to
at least two successive annual meetings. This extension of time also tends to
discourage takeover bids. It also makes it more difficult for a majority of the
shareholders to change the composition of the Board of Directors.
The Articles of Incorporation do not permit cumulative voting. Cumulative
voting would entitle each shareholder to as many votes in the election of
directors as equal the number of shares owned by him multiplied by the number of
directors to be elected. A shareholder may cast all of these votes for one
candidate or distribute them among any two or more candidates. The Corporation's
Articles of Incorporation do not provide for cumulative voting because it is
believed that each Director should represent and act in the interest of all
shareholders and not any special group of shareholders. The absence of
cumulative voting means that a majority of the outstanding shares can elect all
the members of the Board of Directors.
Because each Director of the Corporation also is intended to be a Director
of the Bank, the Corporation's Bylaws require Directors to own at least 500
shares of the Corporation's common stock. Although this provision might be
viewed as anti-takeover in nature, it corresponds to the requirement under
Section 72 of the National Bank Act that all directors of a national bank, such
as the Bank, must own in his or her own right, either shares of the common stock
of such bank or of any company which has control over that bank, the aggregate
par value of which is not less than $1,000. Because the Corporation's common
stock has a par value of $5.00 per share, Section 72 requires that Directors of
the Corporation must own at least 200 shares. The purpose of this requirement is
to assure that directors of national banks have a vested economic interest in
the success or failure of those banks.
Provisions in the Corporation's Bylaws require action by at least 20% of
the votes which all shareholders are entitled to cast in order to call a special
meeting of shareholders. The Corporation's Bylaws also require the affirmative
vote of two-thirds of the issued and outstanding shares to approve an amendment
to the Bylaws. These provisions attempt to ensure that any extraordinary
corporate transaction may be effected only if it receives a clear mandate from
the shareholders.
33
The Articles of Incorporation also provide that the affirmative vote of the
holders of at least 80% of the Corporation's common stock is required to approve
any merger, consolidation, dissolution or liquidation of the Corporation or the
sale of all or substantially all of its assets. This provision also was included
in the Articles of Incorporation in order to ensure that any such transaction
could be effected only if it received a clear mandate from the shareholders. The
provision could be viewed, however, as giving the Corporation's management veto
power over certain transactions regardless of whether those transactions are
desired by or beneficial to a majority of the shareholders. The provision also
could be viewed as giving the holders of a minority of our outstanding shares
veto power over any merger, consolidation, dissolution or liquidation of the
Corporation or the sale of all or substantially all of its assets, even if
management and/or a majority of the shareholders believes the transaction to be
desirable and beneficial. Absent this provision, the affirmative vote of at
least a majority of the shares voted would be required to approve any merger,
consolidation, dissolution, liquidation or sale of all of its assets.
The Articles of Incorporation also include a provision that permits the
Board of Directors to oppose a takeover bid on the basis of factors other than
the economic benefit to shareholders, such as the impact an acquisition of the
Corporation would have on the community; the effect of the acquisition upon
shareholders, employees, depositors, suppliers and customers; and the reputation
and business practices of the bidder. This provision was included in our
Articles of Incorporation to permit the Board of Directors to recognize and take
into account the special relationships existing between the Corporation and its
subsidiaries and the communities that they serve.
PART II
-------
ITEM 1 MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
Market Information
- ------------------
Although shares of the Corporation's common stock are traded from time to
time in private transactions, 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 in any generally
recognized investment media.
The following table reports the highest and lowest per share prices at
which the Corporation's common stock has actually traded in private transactions
during the periods indicated and of which management has knowledge. To the best
of management's knowledge, such prices do not include any retail mark-up, mark-
down or commission. Shares may also have been sold in transactions, the price
and terms of which are not known to the Corporation. Therefore, the per
34
share prices at which the Corporation's stock has previously traded may not
necessarily be indicative of the true market value of the shares.
HIGHEST AND LOWEST PER SHARE
PRICES FOR COMMON STOCK
IN ACTUAL PRIVATE TRANSACTIONS
KNOWN TO CORPORATION
2001 2000
------------------------------------------------
High Low High Low
---- --- ---- ---
First Quarter $48.00 40.00 $42.00 42.00
Second Quarter $40.00 40.00 $56.00 45.00
Third Quarter $40.00 40.00 $65.00 48.00
Fourth Quarter $44.00 40.00 $55.00 55.00
The authorized common stock of the Corporation consists of 10,000,000
shares of common stock, par value $5.00 per share, of which 700,000 shares were
outstanding at March 31, 2002. There are no shares of the Corporation's common
stock (i) that are subject to outstanding options, warrants or securities
convertible into common stock; (ii) that could be sold pursuant to Rule 144
under the Securities Act or 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 has
approximately 507 shareholders of record as of March 31, 2002.
Dividends
- ---------
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 for the stated periods.
35
Cash Dividends
Declared Per Share
------------------
2001 First Quarter $ 0.125
Second Quarter 0.125
Third Quarter 0.130
Fourth Quarter 0.130
-------
$ 0.510
2000 First Quarter $ 0.115
Second Quarter 0.115
Third Quarter 0.120
Fourth Quarter 0.120
-------
$ 0.470
ITEM 2 LEGAL PROCEEDINGS
The Bank from time to time is a party to routine litigation incidental
to its business. The Corporation is not currently a party to any material
litigation.
ITEM 3 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Greenawalt & Company, P.C., of Mechanicsburg, Pennsylvania, were the
appointed independent accountants for the Corporation in 2001. The Board of
Directors each year appoints the independent accountants at their Reorganization
Meeting. Because the Corporation had attained, as of December 31, 2001, more
than 500 shareholders of record, the Corporation now is required to register its
securities with the Securities and Exchange Commission (SEC) and begin filing
periodic reports with the SEC according to applicable law and regulation.
Because Greenawalt & Company, P.C., does not practice in the area of SEC
reporting, the Board of Directors appointed Beard Miller Company LLP,
Harrisburg, Pennsylvania, as the Corporation's independent accountants for 2002.
There were no disagreements with Greenawalt & Company, P.C. on any
matter of accounting principles or practices, financial statement disclosure or
auditing scope or procedure.
ITEM 4 RECENT SALES OF UNREGISTERED SECURITIES
Pursuant to an exemption under SEC Regulation A, on March 1, 2000, the
Corporation commenced the sale of 40,000 shares of its common stock at a price
of $42.00 per share. The share certificates issued pursuant to this offering
indicated that the shares had been acquired for investment and may not be
offered, sold, transferred, pledged or otherwise disposed of without an
effective registration statement. A total of 40,000 shares were sold. The total
36
offering price was $1,680,000, with net proceeds of $1,615,000, and legal fees
and printing costs of $65,000.
ITEM 5 INDEMNIFICATION OF DIRECTORS AND OFFICERS
As permitted by the Pennsylvania Business Corporation Law, the
Corporation's Articles of Incorporation provide that a director shall not be
personally liable for monetary damages as such for any action taken, or any
failure to take any action, unless the director breaches or fails to perform the
duties of his or her office under the BCL, and the breach or failure to perform
constitutes self-dealing, willful misconduct or recklessness. These provisions
of the Corporation's Articles, however, do not apply to the responsibility or
liability of a director pursuant to any criminal statute, or to the liability of
a director for the payment of taxes pursuant to local, Pennsylvania or federal
law. These provisions offer persons who serve on the Board of Directors of the
Corporation protection against awards of monetary damages for negligence in the
performance of their duties.
The Corporation's Articles also provide that every person who is or was
a director or executive officer of the Corporation, or of any corporation which
he served as such at the request of the Corporation, shall be indemnified by the
Corporation to the fullest extent permitted by law against all expenses and
liabilities reasonably incurred by or imposed upon him, in connection with any
proceeding to which he may be made, or threatened to be made, a party, or in
which he may become involved by reason of his being or having been a director or
executive officer of the Corporation or such other company, whether or not he is
a director or executive officer of the Corporation or such other company at the
time the expenses or liabilities are incurred.
37
PART F/S
--------
FIRST COMMUNITY FINANCIAL CORPORATION
FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001 AND 2000
38
TABLE OF CONTENTS
Page
Number
--------
Independent auditors' report 1
Consolidated balance sheets 2
Consolidated statements of income 3
Consolidated statements of changes in shareholders' equity 4
Consolidated statements of cash flows 5
Notes to consolidated financial statements 6 - 22
INDEPENDENT AUDITORS' REPORT
- ----------------------------
Shareholders
First Community Financial Corporation
Two North Main Street
Mifflintown, Pennsylvania
We have audited the accompanying consolidated balance sheets of First Community
Financial Corporation and subsidiary (The First National Bank of Mifflintown) as
of December 31, 2001 and 2000, and the related consolidated statements of
income, changes in shareholders' equity and cash flows for the years then ended.
These financial statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes 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 subsidiary as of December 31, 2001 and 2000, 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.
GREENAWALT & COMPANY, P.C.
January 24, 2002
Mechanicsburg, Pennsylvania
-1-
FIRST COMMUNITY FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2001 and 2000
2001 2000
---- ----
ASSETS
Cash and due from banks $ 7,267,752 $ 4,840,215
Interest bearing demand deposits 693,984 679,220
Federal funds sold 34,000 3,605,000
----------- ----------
Total cash and cash equivalents 7,995,736 9,124,435
Investment securities available for sale 30,792,377 19,360,946
Investment securities held to maturity
(fair value $ 16,316,074 and $ 14,697,127) 16,350,045 14,687,200
Loans, less allowance for loan losses 114,796,769 100,009,754
Premises and equipment 6,619,842 6,546,817
Cash value of life insurance 3,833,699 3,090,522
Accrued interest receivable 796,921 833,289
Other assets 1,305,770 1,284,940
----------- ----------
Total assets $ 182,491,159 $ 154,937,903
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Demand deposits, noninterest bearing $ 15,469,939 $ 14,000,425
Demand deposits, interest bearing 15,263,330 14,350,164
Savings deposits 15,444,382 12,850,697
Time deposits 107,844,361 90,492,434
----------- -----------
Total deposits 154,022,012 131,693,720
Short term borrowings 6,082,862 3,252,219
Long term borrowings 8,200,000 7,200,000
Accrued interest payable 310,447 341,960
Other liabilities 816,369 519,868
----------- -----------
Total liabilities 169,431,690 143,007,767
----------- -----------
Preferred stock, without par value;
10,000,000 shares authorized;
no shares issued or outstanding - -
Common stock, $ 5 par value;
10,000,000 shares authorized;
700,000 shares issued and outstanding 3,500,000 3,500,000
Capital in excess of par value 245,000 245,000
Retained earnings 8,822,376 7,877,876
Accumulated other comprehensive income 492,093 307,260
----------- -----------
Total shareholders' equity 13,059,469 11,930,136
----------- -----------
Total liabilities and shareholders' equity $ 182,491,159 $ 154,937,903
=========== ===========
The accompanying notes are an integral part of these financial statements.
-2-
FIRST COMMUNITY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2001 and 2000
2001 2000
---- ----
Interest income
Loans, including fees $ 9,006,060 $ 8,499,308
Investment securities, taxable 1,698,653 1,592,560
Investment securities, tax exempt 605,645 393,358
Other interest income 201,957 52,197
Dividends on bank stocks 74,606 78,672
---------- ----------
Total interest income 11,586,921 10,616,095
---------- ----------
Interest expense
Deposits 6,103,621 5,264,307
Short term borrowings 107,420 286,815
Long term borrowings 477,908 407,487
---------- ----------
Total interest expense 6,688,949 5,958,609
---------- ----------
Net interest income 4,897,972 4,657,486
Provision for loan losses 78,000 114,000
---------- ----------
Net interest income after
provision for loan losses 4,819,972 4,543,486
---------- ----------
Other income
Service charges on deposits 395,288 352,351
Trust Department fees 173,853 184,950
Other fees and charges 310,988 272,056
Earnings on cash value of life insurance 182,839 164,207
Realized gains on sales of securities 77,131 -
Gains on sales of student loans 3,089 31,802
---------- ----------
Total other income 1,143,188 1,005,366
---------- ----------
Other expenses
Employee compensation and benefits 2,228,043 2,349,515
Net occupancy expenses 345,953 337,745
Equipment expenses 459,761 409,598
Director and advisory boards compensation 207,041 184,682
Other operating expenses 1,123,862 995,041
---------- ----------
Total other expenses 4,364,660 4,276,581
---------- ----------
Income before income taxes 1,598,500 1,272,271
Provision for federal income taxes 297,000 251,000
---------- ----------
Net income $ 1,301,500 $ 1,021,271
========== ==========
Basic earnings per share $ 1.86 $ 1.48
The accompanying notes are an integral part of these financial statements.
-3-
FIRST COMMUNITY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2000 AND 2001
Capital in
Common Excess of Treasury Retained
Stock Par Value Stock Earnings
----- --------- -------- --------
Balance, January 1, 2000 $ 3,500,000 $ 190,000 $ - $ 7,181,005
Acquisition of 40,000 shares in
January 2000 @ $ 39.00 per share - - (1,560,000) -
Reissuance of 40,000 shares in
April 2000 @ $ 42.00 per share
net of reissuance costs of $ 65,000 - 55,000 1,560,000 -
2000 net income - - - 1,021,271
Comprehensive income
Change in net unrealized gains (losses)
on securities available for sale, net
of deferred income taxes of $ 185,192 - - - -
Comprehensive income
2000 cash dividends, $ .47 per share - - - (324,400)
--------- ------- ---------- ----------
Balance, December 31, 2000 3,500,000 245,000 0 7,877,876
2001 net income - - - 1,301,500
Comprehensive income
Change in net unrealized gains on
securities available for sale, net
of reclassification adjustment for
gains of $ 77,131 realized in income
and deferred income taxes of $ 106,729 - - - -
Comprehensive income
2001 cash dividends, $ .51 per share - - - (357,000)
--------- ------- ---------- ----------
Balance, December 31, 2001 $ 3,500,000 $ 245,000 $ 0 $ 8,822,376
========= ======= ========== ==========
Accumulated
Other Total
Comprehensive Shareholders' Comprehensive
Income (Loss) Equity Income
------------- ------------ -------------
Balance, January 1, 2000 $ (61,949) $ 10,809,056
Acquisition of 40,000 shares in
January 2000 @ $ 39.00 per share - (1,560,000)
Reissuance of 40,000 shares in
April 2000 @ $ 42.00 per share
net of reissuance costs of $ 65,000 - 1,615,000
2000 net income - 1,021,271 $ 1,021,271
Comprehensive income
Change in net unrealized gains (losses)
on securities available for sale, net
of deferred income taxes of $ 185,192 369,209 369,209 369,209
---------
Comprehensive income $ 1,390,480
=========
2000 cash dividends, $ .47 per share - (324,400)
------- ----------
Balance, December 31, 2000 307,260 11,930,136
2001 net income - 1,301,500 1,301,500
Comprehensive income
Change in net unrealized gains on
securities available for sale, net
of reclassification adjustment for
gains of $ 77,131 realized in income
and deferred income taxes of $ 106,729 184,833 184,833 184,833
---------
Comprehensive income $ 1,486,333
=========
2001 cash dividends, $ .51 per share - (357,000)
------- ----------
Balance, December 31, 2001 $ 492,093 $ 13,059,469
======= ==========
The accompanying notes are an integral part of these financial statements.
-4-
FIRST COMMUNITY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2001 and 2000
2001 2000
---- ----
Cash flows from operating activities
Net income $ 1,301,500 $ 1,021,271
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation of premises and equipment 463,471 422,968
Amortization of intangible assets 27,600 29,100
Amortization (accretion) of investment securities 51,610 (26,452)
Earnings on cash value of life insurance (182,839) (164,207)
Realized gains on sales of securities (77,131) -
Gains on sales of student loans (3,089) (31,802)
Provision for loan losses 78,000 114,000
Deferred income taxes (46,544) (44,810)
Decrease (increase) in
Accrued interest receivable 36,368 (115,470)
Other assets (48,431) 124,749
Increase (decrease) in
Accrued interest payable (31,513) 87,813
Other liabilities 236,317 (910)
---------- ----------
Net cash provided by operating activities 1,805,319 1,416,250
---------- ----------
Cash flows from investing activities
Investment securities available for sale
Proceeds from maturities and principal repayments 14,523,254 1,375,840
Proceeds from sales 684,898 -
Purchases (26,326,925) (2,160,434)
Investment securities held to maturity
Proceeds from maturities and principal repayments 4,893,536 3,994,829
Purchases (6,551,956) (2,552,219)
Net increase in loans (15,097,048) (7,562,899)
Proceeds from sale of student loans 235,122 2,377,370
Purchases of premises and equipment (536,496) (1,065,892)
Purchases of life insurance (560,338) (187,584)
---------- ----------
Net cash used in investing activities (28,735,953) (5,780,989)
---------- ----------
Cash flows from financing activities
Net increase in deposits 22,328,292 10,638,520
Net increase (decrease) in short term borrowings 2,830,643 (5,967,781)
Proceeds from long term borrowings 2,000,000 7,000,000
Repayments of long term borrowings (1,000,000) (5,200,000)
Proceeds from reissuance of treasury stock - 1,615,000
Acquisition of treasury stock - (1,560,000)
Cash dividends paid (357,000) (324,400)
---------- ----------
Net cash provided by financing activities 25,801,935 6,201,339
---------- ----------
Increase (decrease) in cash and cash equivalents (1,128,699) 1,836,600
Cash and cash equivalents, January 1 9,124,435 7,287,835
---------- ----------
Cash and cash equivalents, December 31 $ 7,995,736 $ 9,124,435
========== ==========
The accompanying notes are an integral part of these financial statements.
-5-
FIRST COMMUNITY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001 and 2000
1. Summary of significant accounting policies
First Community Financial Corporation (the Corporation) and its
wholly-owned subsidiary, The First National Bank of Mifflintown (the Bank),
provide loan, deposit, trust and other related financial services through nine
full service banking offices in Juniata and Perry Counties of Pennsylvania. The
Corporation is subject to regulation and supervision by the Federal Reserve Bank
and the Bank is subject to regulation and supervision by the Office of the
Comptroller of the Currency. The Corporation competes with several other
financial institutions to provide its services to individuals, businesses,
municipalities and other organizations.
Basis of presentation
The Corporation's consolidated financial statements include the
accounts of the parent corporation and its subsidiary. All significant
intercompany accounts and transactions have been eliminated.
The preparation of financial statements in conformity with generally
accepted accounting principles 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 estimate that is
particularly susceptible to significant change is the determination of the
allowance for loan losses.
Assets held by the Trust Department in an agency or fiduciary capacity
for its customers are excluded from the financial statements since they do not
constitute assets of the Corporation. Assets held by the Trust Department
amounted to $ 38,549,171 and $ 36,666,899 at December 31, 2001 and 2000,
respectively.
Certain prior year amounts have been reclassified to conform with the
current year presentation. These reclassifications have no effect on financial
position or results of operations.
Cash and cash equivalents
Cash and cash equivalents includes cash and due from banks, interest
bearing demand deposits and federal funds sold.
Federal funds
Federal funds are reported on a gross basis. Federal funds sold, if any, are
stated as assets and federal funds purchased, if any, are stated as liabilities.
-6-
FIRST COMMUNITY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001 and 2000
Summary of significant accounting policies (Cont'd.)
Investment securities
Investment 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 shareholders' equity, net
of the related deferred tax effect. Any realized gains (losses), based on the
amortized cost of specific securities sold, are included in current operations.
Premiums and discounts are recognized as interest income over the estimated
lives of the securities, using the interest method.
Investment 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.
Loans
Interest income is accrued daily on the outstanding loan balances. Loan
fees (net of costs) are deferred and recognized as interest income over the life
of the individual loans, using the interest method.
Accrual of interest is generally discontinued when principal or interest
becomes 90 days past due or when management believes that the collection of
interest is doubtful based on prevailing economic conditions and collection
efforts. Loans are returned to accrual status only when all factors indicating
doubtful collectibility cease to exist. When a loan is placed on nonaccrual
status, unpaid interest for the current year is removed from interest income and
unpaid interest for prior years is charged against the allowance for loan
losses.
Loan impairment is accounted for in accordance with Financial Accounting
Standards Board Statement No. 114, "Accounting by Creditors for Impairment of a
Loan," as amended by Statement No. 118, "Accounting by Creditors for Impairment
of a Loan--Income Recognition and Disclosure." Under the Statement, a loan is
considered impaired when, based on current information and events, it is
probable that a creditor will be unable to collect all amounts due. The
Statement requires that loans be measured based on the present value of expected
future cash flows, discounted at the loan's effective interest rate, or as a
practical expedient, at the loan's observable market price or the fair value of
the collateral if the loan is collateral dependent. If the measure of the
impaired loan is less than its recorded investment, the Corporation recognizes
impairment by adjusting a valuation allowance. The Statement does not apply to
large groups of homogeneous loans such as consumer installment and residential
mortgage loans, which are collectively evaluated for impairment.
Loans are charged off when there is permanent impairment of the related
recorded investment. The cash-basis method of recognizing interest income is
used for impaired loans for all reported periods as is consistent with the
Corporation's nonaccrual policy.
-7-
FIRST COMMUNITY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd.)
DECEMBER 31, 2001 and 2000
1. Summary of significant accounting policies (Cont'd.)
Allowance for loan losses
The allowance for loan losses is maintained through a provision for
loan losses charged to operations. In management's judgment, the allowance
represents an adequate amount to absorb reasonably foreseeable losses on
existing loans and commitments. Management's judgment is based on changes in the
nature and volume of the loan portfolio, current economic conditions, historical
loan loss experience, collateral value, financial strength of borrowers and
other relevant factors.
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.
Premises and equipment
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.
Goodwill and other intangible assets
Intangible assets are stated at cost less accumulated amortization. Goodwill is
amortized on the straight-line method over 15 years. Core deposit intangibles
are amortized on an accelerated method over 10 years. Annual assessments of the
carrying values and remaining amortization periods are made to determine
possible impairment and appropriate adjustments, as deemed necessary.
Foreclosed real estate
Real estate acquired through foreclosure or deed in lieu of
foreclosure 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.
Advertising costs
The Corporation charges the costs of advertising to expense as incurred.
Advertising expense was $ 51,209 and $ 57,248 for the years ended December 31,
2001 and 2000, respectively.
Federal income taxes
The provision for federal income taxes is based on taxable income as
reported in the financial statements. Certain items of income and expense are
recognized in different periods for financial reporting purposes than for
federal income tax purposes. Deferred income taxes are provided for in the
financial statements for such temporary differences. As changes in tax laws or
rates are enacted, deferred tax assets and liabilities are adjusted through the
provision for federal income taxes.
-8-
FIRST COMMUNITY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd.)
DECEMBER 31, 2001 and 2000
1. Summary of significant accounting policies (Cont'd.)
Earnings per share
The Corporation has a simple capital structure. Basic earnings per share
represents income available to owners of common stock divided by the weighted
average number of common shares outstanding during the period. The weighted
average number of common shares outstanding was 700,000 in 2001 and 690,000 in
2000.
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 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 only item of comprehensive income, and accumulated other comprehensive
income, that the Corporation presently has is unrealized gains (losses) on
securities available for sale.
New accounting pronouncements
The Financial Accounting Standards Board has issued Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities". The
Corporation's adoption of the Statement in January 2001 did not have a
significant impact on the Corporation's financial condition or results of
operations.
In June 2001, the Financial Accounting Standards Board issued Statement No.
141, "Business Combinations," and Statement No. 142, "Goodwill and Other
Intangible Assets."
Statement No. 141 requires all business combinations to be accounted for
using the purchase method of accounting, as use of the pooling-of-interests
method is prohibited. In addition, this Statement requires that negative
goodwill that exists after the basis of certain acquired assets is reduced to
zero should be recognized as an extraordinary gain. The provisions of this
Statement apply to all business combinations initiated after June 2001.
Statement No. 142 prescribes that goodwill associated with a business
combination and intangible assets with an indefinite useful life should not be
amortized but should be tested for impairment at least annually. The Statement
requires intangibles that are separable from goodwill and that have a
determinable useful life be amortized over the determinable useful life. The
provisions of this Statement became effective for the Corporation in January
2002. Upon adoption of this Statement, goodwill and other intangible assets
arising from acquisitions
-9-
FIRST COMMUNITY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd.)
DECEMBER 31, 2001 and 2000
1. Summary of significant accounting policies (Cont'd.)
New accounting pronouncements (Cont'd.)
completed before July 2001 should be accounted for in accordance with the
provisions of this Statement. This transition provision could require a
reclassification of a previously separately recognized intangible to goodwill
and vice versa if the intangibles in question do not meet the new criteria for
classification as a separately recognizable intangible.
At December 31, 2001, the Corporation had intangible assets with a net book
value of $ 190,400, which will continue to be amortized under the new rules.
Amortization expense related to these assets was $ 27,600 and $ 29,100 for the
years ended December 31, 2001 and 2000, respectively.
In July 2001, the Financial Accounting Standards Board issued Statement No. 143,
"Accounting for Asset Retirement Obligations," which addresses the financial
accounting and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs. This
Statement requires that the fair value of a liability for an asset retirement
obligation be recognized in the period in which it is incurred if a reasonable
estimate of fair value can be made. The associated asset retirement costs are
capitalized as part of the carrying amount of the long-lived asset. This
Statement will become effective for the Corporation in January 2003 and is not
expected to have a significant impact on the Corporation's financial condition
or results of operations.
In August 2001, the Financial Accounting Standards Board issued Statement No.
144, "Accounting for the Impairment of or Disposal of Long-Lived Assets." This
Statement supersedes FASB Statement No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of," and the
accounting and reporting provisions of APB Opinion No. 30, "Reporting the
Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions for the Disposal of a Segment of a Business." This Statement also
amends ARB No. 51, "Consolidated Financial Statements." The provisions of this
Statement were effective for the Corporation in January 2002 and did not have a
significant impact on the Corporation's financial condition or results of
operations.
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.
2. Restrictions on cash and due from banks
In return for services obtained through correspondent banks, the Corporation is
required to maintain noninterest bearing cash balances in those correspondent
banks. At December 31, 2001 and 2000 the required balances approximated $
470,000 and $ 461,000, respectively.
-10-
FIRST COMMUNITY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd.)
DECEMBER 31, 2001 and 2000
3. Investment securities available for sale
Amortized cost and fair value at December 31 were as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------------- --------------- --------------- -----
2001
----
U.S. Treasury $ 999,613 $ 13,731 $ - $ 1,013,344
U.S. Agencies 2,397,072 64,525 - 2,461,597
Mortgage backed securities 26,314,728 207,782 77,774 26,444,736
Stock in other banks 281,635 591,065 - 872,700
---------- ---------- ---------- ----------
$ 29,993,048 $ 877,103 $ 77,774 $ 30,792,377
========== ========== ========== ==========
2000
----
U.S. Treasury $ 1,598,450 $ 15,215 $ - $ 1,613,665
U.S. Agencies 9,781,726 194,774 162,460 9,814,040
Mortgage backed securities 7,235,368 36,942 41,140 7,231,170
Stock in other banks 237,635 464,436 - 702,071
--------- ---------- ---------- ----------
$ 18,853,179 $ 711,367 $ 203,600 $ 19,360,946
========== ========== ========== ==========
Amortized cost and fair value at December 31, 2001 by contractual maturity
are shown below. Expected maturities will differ from contractual
maturities because issuers may have the right to call or prepay with or
without penalties.
Amortized Fair
Cost Value
--------------- ----------------
1 year or less $ 999,613 $ 1,013,344
Over 1 through 5 years 2,197,072 2,249,305
Over 5 through 10 years 200,000 212,292
Mortgage backed securities 26,314,728 26,444,736
Equity securities 281,635 872,700
---------- ----------
$ 29,993,048 $ 30,792,377
========== ==========
During 2001, the Corporation realized gross gains of $ 77,131 and gross
losses of $ 0, on sales of available for sale securities. During 2000,
there were no sales of available for sale securities.
At December 31, 2001 and 2000, available for sale securities with fair
value of $ 4,198,186 and $ 7,473,240, respectively, were pledged as
collateral as required by law on public deposits, and for other purposes.
-11-
FIRST COMMUNITY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd.)
DECEMBER 31, 2001 and 2000
4. Investment securities held to maturity
Amortized cost and fair value at December 31 were as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------------- --------- -------------- -----
2001
----
U.S. Treasury $ 399,888 $ 3,021 $ - $ 402,909
State and municipal 14,386,325 146,504 200,698 14,332,131
Mortgage backed securities 1,563,832 17,202 - 1,581,034
---------- ------- ------- ----------
$ 16,350,045 $ 166,727 $ 200,698 $ 16,316,074
========== ======= ======= ==========
2000
----
U.S. Treasury $ 2,798,781 $ 6,265 $ 3,181 $ 2,801,865
U.S. Agencies 513,776 6,296 7,237 512,835
State and municipal 9,224,386 62,073 30,630 9,255,829
Mortgage backed securities 2,150,257 - 23,659 2,126,598
---------- ------- ------- ----------
$ 14,687,200 $ 74,634 $ 64,707 $ 14,697,127
========== ======= ======= ==========
Amortized cost and fair value at December 31, 2001 by
contractual maturity are shown below. Expected maturities will differ from
contractual maturities because issuers may have the right to call or prepay with
or without penalties.
Amortized Fair
Cost Value
--------- ---------
1 year or less $ 1,779,795 $ 1,798,499
Over 1 through 5 years 4,547,652 4,653,694
Over 5 through 10 years 1,341,915 1,328,608
Over 10 through 15 years 1,479,065 1,460,370
Over 15 years 5,637,786 5,493,869
Mortgage backed securities 1,563,832 1,581,034
---------- ----------
$ 16,350,045 $ 16,316,074
========== ==========
At December 31, 2001 and 2000, held to maturity securities
with amortized cost of $ 10,040,947 and $ 5,896,948, respectively (fair value of
$ 10,111,197 and $ 5,909,184, respectively) were pledged as collateral as
required by law on public deposits, and for other purposes.
5. Loans
Loans at December 31 were as follows:
2001 2000
---- ----
Mortgages - residential $ 60,269,183 $ 52,462,280
Mortgages - commercial 20,780,016 16,435,252
Installment 24,273,358 21,563,434
Commercial and agricultural 9,303,960 7,801,950
Municipal loans 388,727 1,394,989
Home equity loans 739,329 731,258
Student loans - 276,144
All other 354,249 557,375
----------- -----------
116,108,822 101,222,682
Unearned income - loan fees (274,055) (246,487)
Allowance for loan losses (1,037,998) (966,441)
----------- -----------
$ 114,796,769 $ 100,009,754
=========== ===========
-12-
FIRST COMMUNITY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd.)
DECEMBER 31, 2001 and 2000
5. Loans (Cont'd.)
At December 31, 2001 and 2000 loans that the Corporation serviced for the
benefit of others were $ 3,984,854 and $ 2,132,168, respectively.
At December 31, 2001 and 2000 there were no impaired loans. At December 31,
2001, the accrual of interest has been discontinued on loans of $ 746,572, and
interest was not being accrued on any loans over 90 days past due. At December
31, 2001 and 2000 the interest that had been earned but not accrued was $ 26,682
and $ 2,194, respectively.
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. Approximate changes during
2001 in these related party loans were as follows:
Balance, January 1 $ 580,000
Additions 577,000
Reductions (377,000)
--------
Balance, December 31 $ 780,000
========
6. Allowance for loan losses
Changes in the allowance for loan losses were as follows:
2001 2000
---- ----
Balance, January 1 $ 966,441 $ 863,104
Provision charged to operations 78,000 114,000
Recoveries on charged off loans 11,590 4,167
Loans charged off (18,033) (14,830)
--------- -------
Balance, December 31 $ 1,037,998 $ 966,441
========= =======
7. Premises and equipment
Premises and equipment at December 31 were as follows:
2001 2000
---- ----
Land $ 690,589 $ 617,769
Buildings and improvements 5,970,905 5,815,076
Furniture and equipment 2,395,963 2,308,028
--------- ---------
9,057,457 8,740,873
Less accumulated depreciation 2,437,615 2,194,056
--------- ---------
$ 6,619,842 $ 6,546,817
========= =========
The estimated useful lives of buildings and improvements range
from 20 to 40 years, and from 5 to 15 years for furniture and equipment.
-13-
FIRST COMMUNITY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd.)
DECEMBER 31, 2001 and 2000
8. Cash value of life insurance
The Corporation is the owner of single premium life insurance policies on
participants in the non-qualified retirement plans that are maintained for
selected employees and directors. At December 31, 2001 and 2000, the cash value
of these policies were $ 3,833,699 and $ 3,090,522, respectively, which amounts
are immediately available to the Corporation upon surrender of the policies.
9. Goodwill and other intangible assets
During 1996, the Corporation purchased two offices from another bank, which
included $ 351,000 assigned to core deposit intangibles and goodwill. The
balances of core deposit intangibles and goodwill at December 31, 2001 were $
25,200 and $ 165,200, respectively (see note 1).
10. Equity securities without readily determinable fair values
Equity securities without readily determinable fair values, consisting of
restricted investments in Federal Reserve Bank stock, Federal Home Loan Bank
stock, and Atlantic Central Bankers Bank stock are included in other assets. At
December 31, 2001 and 2000 these equity securities are stated at cost of $
922,200 and $ 874,400, respectively.
11. Time deposits
Scheduled maturities of time deposits at December 31, 2001 were as follows:
1 year or less $ 77,383,553
Over 1 through 2 years 14,116,051
Over 2 through 3 years 5,550,742
Over 3 through 4 years 6,665,224
Over 4 through 5 years 4,026,397
Over 5 years 102,394
-----------
$ 107,844,361
===========
Time deposits of $ 100,000 and over were $ 25,482,012 and $ 20,444,027 at
December 31, 2001 and 2000, respectively.
12. Short term borrowings
Short term borrowings at December 31 were as follows:
2001 2000
---- ----
Federal Home Loan Bank - RepoPlus $ 1,800,000 $ -
Securities sold under agreements
to repurchase 4,264,426 3,152,219
Treasury tax and loan note 18,436 100,000
--------- ---------
$ 6,082,862 $ 3,252,219
========= =========
Securities sold under agreements to repurchase generally mature within one day
from the transaction date. Securities with a carrying amount of $ 3,927,523 and
$ 3,700,865 at December 31, 2001 and 2000, respectively were pledged as
collateral for these agreements. The securities underlying the agreements were
under the Corporation's control.
-14-
FIRST COMMUNITY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd.)
DECEMBER 31, 2001 and 2000
13. Long term borrowings
Long term borrowings from Federal Home Loan Bank at December 31 were as
follows:
Maturity Interest
Description Date Rate 2001 2000
- ----------- ------------------ ---------------- ---- ----
Adjustable-RepoPlus May 2001 6.75 $ - $ 1,000,000
Fixed Rate June 2002 7.87 200,000 200,000
Convertible January 2010 5.99 1,000,000 1,000,000
Convertible February 2010 5.91 2,000,000 2,000,000
Convertible May 2010 6.50 1,000,000 1,000,000
Convertible July 2010 6.54 2,000,000 2,000,000
Convertible March 2011 3.94 1,000,000 -
Convertible March 2011 4.98 1,000,000 -
--------- ---------
$ 8,200,000 $ 7,200,000
========= =========
The Corporation has a maximum borrowing capacity through Federal Home Loan
Bank in excess of $ 85,000,000, which is collateralized by security agreements
in certain assets of the Corporation.
14. Real estate operating leases
In 1999, the Corporation renegotiated the lease for its Delaware (Juniata
County) office. The lease term is ten years, with options for three additional
five year periods. The monthly lease payment is adjusted annually by the
consumer price index, with limitations. The monthly payment in effect for
December 2001 was $ 1,682.
In 1999, the Corporation negotiated a lease with an option to purchase a
small parcel of land, upon which the Corporation constructed its East Waterford
office. The lease term is ten years, with options for three additional five year
periods. The monthly lease payment is adjusted annually by the consumer price
index, with limitations. The monthly payment in effect for December 2001 was $
250. From 2003 through 2010 the Corporation has an option to purchase the land,
for predetermined prices ranging from $ 105,000 up to $ 125,000.
In 1999, the Corporation negotiated to construct a building, adjacent to
its West Perry office, for lease to the United States Postal Service. The lease
term is for twenty five years, and the Corporation will receive monthly payments
of $ 3,181, and reimbursement for real estate taxes.
The Corporation also receives rental income for leasing of available space
at its Mifflintown and Loysville offices.
Net occupancy expenses includes the following real estate lease amounts:
2001 2000
---- ----
Lease expense $ 23,183 $ 22,933
Lease income 51,966 27,610
--------- ---------
$ (28,783) $ (4,677)
========= =========
-15-
FIRST COMMUNITY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd.)
DECEMBER 31, 2001 and 2000
14. Real estate operating leases (Cont'd.)
The minimum future rental payments under the terms of these leases at
December 31, 2001 were as follows:
Lease Lease
Year Expense Income
---- ------- ------
2002 $ 23,183 $ 38,166
2003 20,433 38,166
2004 20,183 38,166
2005 20,183 38,166
2006 20,183 38,166
After 2006 45,412 709,251
------- -------
$ 149,577 $ 900,081
======= =======
15. Other operating expenses
Other operating expenses were as follows:
2001 2000
---- ----
Professional and regulatory fees $ 340,688 $ 272,734
Correspondent bank charges 181,788 153,234
State shares tax 102,491 94,884
Supplies and postage 183,525 156,214
Telephone and other communications 93,634 79,529
All other expenses 21,736 238,446
--------- -------
$ 1,123,862 $ 995,041
========= =======
16. Federal income taxes
The provision (benefit) for federal income taxes was as follows:
2001 2000
---- ----
Tax at statutory rates $ 543,490 $ 432,572
Effect of tax exempt securities (170,536) (109,464)
Effect of municipal loans (18,850) (16,758)
Effect of cash value of insurance (53,848) (48,209)
Effect of other items (3,256) (7,141)
-------- --------
$ 297,000 $ 251,000
======== ========
Current portion $ 343,544 $ 295,810
Deferred portion (46,544) (44,810)
-------- --------
$ 297,000 $ 251,000
======== ========
The provision for federal income taxes includes $ 26,225 and $ -0- of income
taxes related to gains on sales of securities in 2001 and 2000, respectively.
-16-
FIRST COMMUNITY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd.)
DECEMBER 31, 2001 and 2000
16. Federal income taxes (Cont'd.)
The Corporation provides deferred taxes, at statutory rates, on cumulative
temporary differences. Components of deferred tax assets and liabilities at
December 31 were as follows:
2001 2000
---- ----
Deferred tax assets
Allowance for loan losses $ 308,419 $ 284,089
Loans and accrued interest 9,072 7,497
Intangible assets 13,498 12,070
Retirement liabilities 131,581 102,872
------- -------
462,570 406,528
------- -------
Deferred tax liabilities
Accumulated depreciation 255,024 245,526
Available for sale securities 307,236 200,507
------- -------
562,260 446,033
------- -------
Net deferred tax (liabilities) $ (99,690) $ (39,505)
======= =======
17. 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 $ 94,513 and $ 86,230 for 2001 and
2000, respectively.
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:
2001 2000
---- ----
Employee compensation $ 43,787 $ 73,749
Director compensation 52,511 37,979
18. Supplemental cash flow information
Cash paid during the year for interest and income taxes was as follows:
2001 2000
---- ----
Interest $ 6,720,462 $ 5,870,796
Income taxes 294,300 361,580
19. Regulatory matters
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,
-17-
FIRST COMMUNITY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd.)
DECEMBER 31, 2001 and 2000
19. Regulatory matters (Cont'd.)
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 judgements 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 I capital to average assets and of Tier I and total capital
(as defined in the regulations) to risk weighted assets. Management believes, as
of December 31, 2001, that the Corporation and the Bank meet all capital
adequacy requirements to which they are subject.
As of December 31, 2001, the most recent notification from the regulators
categorized the Corporation and 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
Corporation's or Bank's category.
The Corporation's actual and required capital amounts and ratios were as
follows (dollar amounts in thousands):
To Be Well Capi-
talized Under The
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
-------------------- ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
December 31, 2001
-----------------
Tier I leverage ratio
(to average assets) $ 12,377 6.90% * $ 7,175 * 4.0% * $ 8,969 * 5.0%
Tier I risk-based capital ratio
(to risk-weighted assets) 12,377 12.48 * 3,967 * 4.0 * 5,950 * 6.0
Total risk-based capital ratio
(to risk-weighted assets) 13,415 13.52 * 7,938 * 8.0 * 9,922 * 10.0
December 31, 2000
-----------------
Tier I leverage ratio
(to average assets) $ 11,405 7.51% * $ 6,075 * 4.0% * $ 7,593 * 5.0%
Tier I risk-based capital ratio
(to risk-weighted assets) 11,405 12.83 * 3,556 * 4.0 * 5,334 * 6.0
Total risk-based capital ratio
(to risk-weighted assets) 12,371 13.92 * 7,110 * 8.0 * 8,887 * 10.0
* Greater than or equal to
The Bank's ratios do not differ significantly from the Corporation's ratios
presented above.
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, 2001, approximately $ 2,438,000 of undistributed earnings
of the Bank, included in consolidated shareholders' equity, was available for
distribution to the Corporation as dividends without prior regulatory approval.
-18-
FIRST COMMUNITY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd.)
DECEMBER 31, 2001 and 2000
20. Financial instruments with 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.
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:
2001 2000
---- ----
Commitments to extend credit $ 13,970,000 $ 10,770,000
Standby letters of credit 104,000 108,000
-19-
FIRST COMMUNITY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd.)
DECEMBER 31, 2001 and 2000
21. Concentrations of credit risk
The Corporation grants commercial, residential and consumer loans to
customers primarily within Juniata and Perry Counties of Pennsylvania and the
surrounding area. The loan portfolio is diversified, as disclosed in Note 5.
22. Fair value of financial instruments
Financial Accounting Standard No. 107 requires disclosures about fair value
of financial instruments. The fair value estimates are based upon subjective
assumptions and involve significant uncertainties resulting in estimates that
vary with changes in assumptions. Any changes in assumptions or estimation
methodologies may have a material effect on the estimated fair values disclosed.
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments:
For the following financial instruments, the carrying value is a reasonable
estimate of fair value:
Cash and cash equivalents
Accrued interest receivable
Equity securities without readily determinable fair values
Short term borrowings
Accrued interest payable
For investment securities, fair value is based on quoted market prices,
where available. If quoted market prices are not available, fair value is based
on quoted market prices of comparable securities.
For floating rate loans that reprice frequently and which entail no
significant changes in credit risk, the carrying amount is a reasonable estimate
of fair value. For fixed rate loans, fair value is estimated using discounted
cash flow analysis, at interest rates currently offered for loans with similar
terms to borrowers of similar credit quality.
For demand deposits, the carrying amount is a reasonable estimate of fair
value. For savings and time deposits, fair value is estimated using discounted
cash flow analysis, at interest rates currently offered for deposits with
similar maturities.
For long term borrowings, fair value is based on currently available rates
for borrowings with similar terms and remaining maturities.
For off balance sheet instruments, fair value is estimated using fees
currently charged for similar agreements.
-20-
FIRST COMMUNITY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd.)
DECEMBER 31, 2001 and 2000
22. Fair value of financial instruments (Cont'd.)
Estimated fair values of financial instruments at December 31 were as
follows:
2001 2000
--------------------------------- ---------------------------------
Carrying Fair Carrying Fair
Value Value Value Value
-------- ----- -------- -----
Financial assets
Cash and cash equivalents $ 7,995,736 $ 7,995,736 $ 9,124,435 $ 9,124,435
Investment securities
Available for sale 30,792,377 30,792,377 19,360,946 19,360,946
Held to maturity 16,350,045 16,316,074 14,687,200 14,697,127
Loans, less allowance
for loan losses 114,796,769 116,351,372 100,009,754 100,539,197
Accrued interest receivable 796,921 796,921 833,289 833,289
Equity securities without readily
determinable fair values 922,200 922,200 874,400 874,400
Financial liabilities
Deposits 154,022,012 155,790,254 131,693,720 131,759,751
Short term borrowings 6,082,862 6,082,862 3,252,219 3,252,219
Long term borrowings 8,200,000 8,850,364 7,200,000 7,206,548
Accrued interest payable 310,447 310,447 341,960 341,960
Off balance sheet instruments 0 0 0 0
23. Contingencies
The Corporation is also 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.
24. Subsequent event - Additional banking office
The Corporation has applied for regulatory approval to open an office in
Shermans Dale, Perry County, Pennsylvania. The Corporation has negotiated the
lease of a facility currently leased by another bank. The lease term is one
year, with options for five additional one year periods. The monthly lease
payment will be $ 1,350.
-21-
FIRST COMMUNITY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd.)
DECEMBER 31, 2001 and 2000
25. Condensed financial information for parent company only
2001 2000
BALANCE SHEETS
DECEMBER 31, 2001 and 2000
Cash $ 16,928 $ 34,767
Investment in subsidiary 12,406,267 11,379,073
Investment securities available for sale 872,700 702,071
---------- ----------
Total assets $ 13,295,895 $ 12,115,911
========== ==========
Deferred tax liability $ 236,426 $ 185,775
Shareholders' equity 13,059,469 11,930,136
---------- ----------
Total liabilities and shareholders' equity $ 13,295,895 $ 12,115,911
========== ==========
STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2001 and 2000
Dividends from subsidiary $ 377,000 $ 344,400
Other dividends 16,352 18,875
---------- ----------
393,352 363,275
Expenses 10,191 68,083
---------- ----------
383,161 295,192
Equity in undistributed earnings of subsidiary 918,339 726,079
---------- ----------
Net income $ 1,301,500 $ 1,021,271
========== ==========
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2001 and 2000
Cash flows from operating activities
Net income $ 1,301,500 $ 1,021,271
Adjustments to reconcile net income to net
cash provided by operating activities
Equity in undistributed earnings of subsidiary (918,339) (726,079)
---------- ----------
383,161 295,192
Cash flows from investing activities
Purchases of investment securities (44,000) (40,250)
Cash flows from financing activities
Proceeds from reissuance of treasury stock - 1,615,000
Acquisition of treasury stock - (1,560,000)
Cash dividends paid (357,000) (324,400)
---------- ----------
Increase (decrease) in cash (17,839) (14,458)
Cash, January 1 34,767 49,225
---------- ----------
Cash, December 31 $ 16,928 $ 34,767
========== ==========
-22-
PART III
--------
ITEM 1 INDEX TO EXHIBITS
2(a) Articles of Incorporation of First Community Financial
Corporation, as amended
2(b) Bylaws of First Community Financial Corporation, as amended
6(b)(1) Lease - Delaware Branch Office
6(b)(2) Lease - East Waterford Branch Office
6(b)(3) Lease - Shermans Dale Branch Office
6(c)(1) Salary Continuation Agreement dated August 19, 1997 between
James McLaughlin and The First National Bank of Mifflintown
6(c)(2) Salary Continuation Agreement dated September 22, 1997 between
Leona Shollenberger and The First National Bank of Mifflintown
6(c)(3) Salary Continuation Agreement dated August 28, 1997 between
Jody Graybill and The First National Bank of Mifflintown
6(c)(4) Salary Continuation Agreement dated September 18, 1997 between
Timothy Stayer and The First National Bank of Mifflintown
6(c)(5) Salary Continuation Agreement dated April 10, 2000 between
Marcie A. Barber and The First National Bank of Mifflintown
6(c)(6) Salary Continuation Agreement dated November 5, 2001 between
Richard R. Leitzel and The First National Bank of Mifflintown
6(c)(7) Officer Group Term Replacement Plan
6(c)(8) Director Deferred Fee Agreement dated September 29, 1997
between James McLaughlin and The First National Bank of
Mifflintown
6(c)(9) Director Deferred Fee Agreement dated September 29, 1997
between Joseph Barnes and The First National Bank of
Mifflintown
6(c)(10) Director Deferred Fee Agreement dated September 30, 1997
between Roger Shallenberger and The First National Bank of
Mifflintown
6(c)(11) Director Deferred Fee Agreement dated April 9, 2002 between
Nancy S. Bratton and The First National Bank of Mifflintown
6(c)(12) Director Deferred Fee Agreement dated April 9, 2002 between
John P. Henry and The First National Bank of Mifflintown
6(c)(13) Director Deferred Fee Agreement dated April 9, 2002 between
Samuel G. Kint and The First National Bank of Mifflintown
6(c)(14) Director Revenue Neutral Retirement Agreement dated September
29, 1997 between James McLaughlin and The First National Bank
of Mifflintown
6(c)(15) Director Revenue Neutral Retirement Agreement dated September
30, 1997 between John H. Sheaffer and The First National Bank
of Mifflintown
6(c)(16) Director Revenue Neutral Retirement Agreement dated September
29, 1997 between Donald Adams and The First National Bank of
Mifflintown
63
6(c)(17) Director Revenue Neutral Retirement Agreement dated September
29, 1997 between Joseph Barnes and The First National Bank of
Mifflintown
6(c)(18) Director Revenue Neutral Retirement Agreement dated September
29, 1997 between Samuel F. Metz and The First National Bank of
Mifflintown
6(c)(19) Director Revenue Neutral Retirement Agreement dated September
30, 1997 between Clair E. McMillen and The First National Bank
of Mifflintown
6(c)(20) Director Revenue Neutral Retirement Agreement dated September
29, 1997 between Roger Shallenberger and The First National
Bank of Mifflintown
6(c)(21) Director Revenue Neutral Retirement Agreement dated September
29, 1997 between John Tetwiler and The First National Bank of
Mifflintown
6(c)(22) Director Revenue Neutral Retirement Agreement dated September
29, 1997 between Richard Wible and The First National Bank of
Mifflintown
6(c)(23) Director Revenue Neutral Retirement Agreement dated March 31,
1998 between Lowell M. Shearer and The First National Bank of
Mifflintown
6(c)(24) Director Revenue Neutral Retirement Agreement dated March 24,
1998 between Charles C. Saner and The First National Bank of
Mifflintown
10 Consent of Greenawalt & Company, P.C.
ITEM 2 DESCRIPTION OF EXHIBITS
See Item 1 above.
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities
Exchange Act of 1934, the registrant has duly caused this registration statement
to be signed by the undersigned, thereunto duly authorized.
FIRST COMMUNITY FINANCIAL
CORPORATION
By: /s/ James R. McLaughlin
----------------------------
James R. McLaughlin
President and Chief
Executive Officer
Date: April 17, 2002
64