ITEM 1. 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 The 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 our current income.
The First National Bank of Mifflintown
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 eleven full service banking offices. The main banking office is located in the Borough of Mifflintown, four branch offices are maintained in Juniata County and six branch offices are maintained in Perry County, Pennsylvania.
As of December 31, 2010, the Bank had total assets of $374.2 million, total shareholders’ equity of $28.3 million, and total deposits of $317.8 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 concentrates its lending activities on residential real estate, commercial real estate, commercial loans, agricultural loans and consumer installment loans. A substantial portion of the loan portfolio is secured by commercial and residential real estate, either as primary or secondary collateral. Loan approvals are made in accordance with a policy that includes delegated authorities approved by the Board of Directors. Loans are approved at various management levels up to and including the Board of Directors, depending on the amount of the loan.
As of December 31, 2010, residential real estate loans represented 61.2% of the total loan portfolio. These types of loans represent a relatively low level of risk, especially in the absence of speculative lending. The most prominent risks in this market are those associated with declining economic conditions resulting from economic downturns and increases in unemployment, which could affect borrowers’ abilities to repay loans. The Bank limits its risk in this area by often requiring private mortgage insurance for certain residential real estate loans in excess of 80% of the appraised value.
Commercial real estate loans represented 19.3%, commercial, financial and agricultural loans represented 16.4% and construction loans represented 1.0% of the total loan portfolio at December 31, 2010. Commercial real estate loans consist primarily of loans to local businesses where the collateral for the loans includes the real estate occupied by the business. Commercial loans are comprised of loans to small businesses whose demand for funds fall within the legal lending limits of the Bank. The Bank’s agricultural loans generally consist of operating lines used to finance farming operations through the growing season and term loans to finance farm equipment purchases. Risks associated with these types of loans can be significant and include, but are not limited to, fraud, bankruptcy, economic downturn, deteriorated or non-existing collateral and changes in interest rates. The Bank controls risk by using certified appraisers in determining property values, by performing thorough credit analysis and by limiting the Bank’s total exposure to these types of loans.
As of December 31, 2010, consumer installment loans represented 2.1% of the total loan portfolio and are made on a secured and unsecured basis, primarily to fund personal, family and household purposes, including loans for automobiles, home improvement, education loans and investments. Risks associated with consumer installment loans include, but are not limited to, fraud, deteriorated or non-existing collateral, general economic downturn and customer financial problems. Risk in this area is limited by analyzing creditworthiness and controlling debt to income limits.
The Bank’s Trust Department provides a broad range of personal trust services. It administers and provides investment management services for estates, trusts, agency accounts and employee benefit plans. For the year ended December 31, 2010, income from the Bank’s fiduciary activities amounted to $474,000 and the Bank had assets worth $108.2 million under management in its Trust Department at that time.
The Bank is subject to regulation and periodic examination by the Office of the Comptroller of the Currency (the “OCC”).
During the last five years, the Corporation has experienced substantial growth. Specifically, the Corporation’s total assets increased from $267.2 million as of December 31, 2005 to $374.2 million as of December 31, 2010, funded primarily by an increase in the Bank’s total deposits over this period from $211.9 million to $317.8 million. Additionally, the Bank’s loans increased from $161.8 million to $236.2 million over this same period, while the Corporation’s annual net income ranged between $2.0 million and $3.7 million.
The growth in the Bank’s deposits and loans reflect its efforts to increase its market share in Juniata and Perry Counties and is largely attributable to the maturation of the Bank’s newer branches in East Waterford, Juniata County and Loysville, New Bloomfield, Shermans Dale and Bloomfield Borough, Perry County and expansion of its products, services and expertise.
Market Area and Competition
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 estimated population of 68,620 in 2010, representing an increase of approximately 2.4% since 2000. The primary industries in the region are agriculture and timber/woodworking. Unemployment rates in 2010 were 6.7% in Juniata County and 7.7% in Perry County. With a stable workforce and growing population, the Corporation believes that the region’s long term economic prospects are positive.
As of June 30, 2010, three commercial banks (the Bank, Juniata Valley Bank, and First National Bank of Pennsylvania) operated offices in Juniata County. Of all financial institutions operating in Juniata County, the Bank ranked first in terms of total deposits at June 30, 2010 with 49.55%. Juniata Valley Bank followed closely with 41.84% and First National Bank of Pennsylvania ranked third with 8.61%. Each of the institutions with which the Bank competes in Juniata County is 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 somewhat wider variety of services than does the Bank.
In Perry County, the Bank faces competition from six banks. Several 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 32.75% of deposits at June 30, 2010, Riverview National Bank, with approximately 17.64%, and Orrstown Bank, with approximately 15.26%. The Bank has 17.06% of the deposits in Perry County as of June 30, 2010.
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
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 FDIC. The Bank is therefore subject to regulation by the FDIC but as a national bank, is primarily regulated and examined by the 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 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 OCC 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, at December 31, 2010, the Bank, without prior regulatory approval, could currently declare dividends to the Corporation totaling approximately $5,665,000.
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, 2010, the Corporation and the Bank each exceeded the minimum capital levels of the well-capitalized category.
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 depository institutions with assets of $500 million or more must consist of a majority of outside directors and the audit committee of depository institutions with $1 billion or more in total assets must consist entirely of outside directors. 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.
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 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 $500 million must be examined on-site annually by their primary federal or state regulator or the FDIC.
FDIC Insurance and Assessments
Deposit accounts in the Bank are insured by the FDIC generally up to a maximum of $250,000 per separately insured depositor and up to a maximum of $250,000 for self-directed retirement accounts. The Bank’s deposits, therefore, are subject to FDIC deposit insurance assessments.
In 2008 and 2009, higher levels of bank failures dramatically increased the resolution costs of the FDIC, and depleted the deposit insurance fund. In addition, the FDIC and the U.S. Congress have taken action to increase federal insurance coverage, placing additional stress on the deposit insurance fund. In order to maintain a strong funding position and restore reserve ratios of the deposit insurance fund, the FDIC increased assessment rates of insured institutions uniformly by seven cents for every $100 of deposits beginning with the first quarter of 2009, with additional changes beginning April 1, 2009, which require riskier institutions to pay a larger share of premiums by factoring in rate adjustments based on secured liabilities and unsecured debt levels. To further support the rebuilding of the deposit insurance fund, the FDIC imposed a special assessment on each insured institution, equal to five basis points of the institution’s total assets minus Tier 1 capital as of September 30, 2009. For the Bank, an aggregate charge of $660,000 was recorded as a charge to operating costs in 2009. The FDIC has indicated that future special assessments are possible, although it has not determined the magnitude or timing of any future assessments. In December 2009, we paid a pre-payment of FDIC’s estimated assessment total for the next three years, totaling approximately $1.6 million. The pre-payment amount has been included in Other Assets in the consolidated balance sheet and will continue to be amortized, subject to adjustments imposed by the FDIC, over the next three years.
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-Bliley Act also provides that a financial institution will be subject to CRA examinations no more frequently than every 5 years if it’s most recent CRA rating was “outstanding,” or every 4 years if its rating was “satisfactory.” Following a CRA examination as of March 17, 2009, the Bank received a rating of “satisfactory.”
Financial Services Modernization Legislation
The Gramm-Leach-Bliley Act of 1999 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. We have not elected to become a financial holding company.
In addition, national banks are authorized to conduct these activities through “financial subsidiaries,” under the supervision of the OCC, 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.
Bank Secrecy Act and Related Laws and Regulations - These laws and regulations have significant implications for all financial institutions. They increase due diligence requirements and reporting obligations for financial institutions, create new crimes and penalties, and require the federal banking agencies, in reviewing merger and other acquisition transactions, to consider the effectiveness of the parties to such transactions in combating money laundering activities. Even innocent noncompliance and inconsequential failure to follow the regulations can result in significant fines or other penalties which could have a material adverse impact on the Corporation’s financial condition, results of operations or liquidity.
Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Act”) - On July 21, 2010 President Obama signed the Act into law. The Act contains numerous and wide-ranging changes to the structure of the U.S. financial system. Portions of the Act are effective at different times, and many of the provisions require follow-on, more detailed rulemaking by regulators. Consequently, the Act’s impact on the financial system in general and the Corporation in particular cannot be predicted at this time. Some of the Act’s provisions management believes may impact the Corporation’s financial condition and results of the operations over the next few years are as follows:
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requires the establishment of minimum leverage and risk-based capital requirements applicable to bank holding companies that are not less than those currently applicable to insured depository institutions (currently 5%, 6% and 10% to be “well capitalized”, and 4%, 4% and 8% to be “adequately capitalized”) The minimum capital requirements do not apply to small bank holding companies such as the Corporation. Small bank holding companies are defined as holding companies with less than $500 million in assets.
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alters the FDIC’s base for determining deposit insurance assessments by requiring the assessments be determined based on the “average consolidated total assets” less the institution’s “average tangible equity,” rather than on a bank’s deposits.
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increases the FDIC’s minimum reserve ratio for the deposit insurance fund from 1.15% to 1.35% of estimated deposits with no upward limit. The FDIC is required to “offset the effect” of the increased minimum reserve ratio on institutions with less than $10 billion in total consolidated assets. The intent appears to be to require the FDIC to impose higher premiums on larger banks in order to get from the old minimum of 1.15% to the new 1.35%, but given the current reserve ratio of negative 0.38%, all institutions can expect assessments to remain significant for the foreseeable future. The Act allows the FDIC until September 30, 2020 to reach 1.35%.
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eliminates the prohibition against paying interest on commercial checking accounts, effective one year after enactment.
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requires the Federal Reserve, within nine months of enactment, to prescribe regulations to establish standards for determining that interchange transaction fees meet the new statutory standard of reasonable and proportional to the cost. Card issuers which, together with their affiliates, have less than $10 billion in assets are exempt from these new regulations.
The Act has other significant features, some of which are as follows: (i) makes permanent the 2008 increase in the maximum deposit insurance amount of $250,000, and extends until December 31, 2012 full deposit insurance coverage for qualifying noninterest-bearing transaction accounts, (ii) within the Act is the Mortgage Reform and Anti-Predatory Lending Act, a broad piece of legislation intended to curtail abusive residential mortgage lending practices that contributed to the mortgage/housing crisis, (iii) requires the formation of the Bureau of Consumer Financial Protection as a new, independent bureau within the Federal Reserve, with very broad rulemaking and supervisory authority with respect to federal consumer financial laws, (iv) establishes the Financial Stability Oversight Council, to serve as an early warning system indentifying risks in firms and market activities, to enhance oversight of the financial system as a whole and to harmonize prudent standards across financial regulatory agencies, and (v) establishes several requirements related to executive compensation and corporate governance.
Other Laws and Regulations
State usury and credit laws limit the amount of interest and various other charges collected or contracted by a bank on loans. The Bank’s loans are also subject to federal laws applicable to credit transactions, such as the following:
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Federal Truth-In-Lending Act, which governs disclosures of credit terms to consumer borrowers;
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Home Mortgage Disclosure Act, requiring financial institutions to provide information to enable public officials to determine whether a financial institution is fulfilling its obligations to meet the housing needs of the community it serves;
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Equal Credit Opportunity Act prohibiting discrimination on the basis of race, creed or other prohibitive factors in extending credit;
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Real Estate Settlement Procedures Act, which requires lenders to disclose certain information regarding the nature and cost of real estate settlements, and prohibits certain lending practices, as well as limits escrow account amounts in real estate transactions;
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Fair Credit Reporting Act governing the manner in which consumer debts may be collected by collection agencies; and
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Various rules and regulations of various federal agencies charged with the implementation of such federal laws.
Additionally, our operations are subject to the additional federal laws and regulations, including, without limitation:
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Privacy provisions of the Gramm-Leach-Bliley Act and related regulations, which require us to maintain privacy policies intended to safeguard customer financial information, to disclose the policies to our customers and to allow customers to “opt out” of having their financial service providers disclose their confidential financial information to non-affiliated third parties, subject to certain exceptions;
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Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records;
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Consumer protection rules for the sale of insurance products by depository institutions, adopted pursuant to the requirements of the Gramm-Leach-Bliley Act; and
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Title III of the USA Patriot Act, which requires financial institutions to take certain actions to help prevent, detect and prosecute international money laundering and the financing of terrorism.
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Section 404 of the Sarbanes-Oxley Act of 2002 requires management to issue a report on the effectiveness of its internal controls over financial reporting. Certifications of the Principal Executive Officer and Chief Financial Officer as required by Sarbanes - Oxley and the resulting SEC rules can be found in the “Signatures” and “Exhibits” sections.
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
As of December 31, 2010, the Bank had a total of 69 full-time and 58 part-time employees.
Selected Statistical Information
Certain statistical information is included as part of Management’s Discussion and Analysis of Financial Conditions and Results of Operations, included on pages 48 through 63 of the Annual Report to Shareholders for the year ended December 31, 2010, attached to this Report as Exhibit 13 and incorporated herein by reference.
ITEM 1A.
ITEM 1A. Risk Factors.
(Not required of a smaller reporting company)
ITEM 1B.
ITEM 1B. Unresolved Staff Comments.
Not applicable.
ITEM 2.
ITEM 2. Properties.
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
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
Spring and Tyrone Townships, Perry County, Pennsylvania
Ickesburg Branch
Route 17 West
Ickesburg, Perry County, Pennsylvania
Bloomfield Borough Branch
216 S. Carlisle St.
New Bloomfield, 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 under a lease that has been renewed and shall expire on March 31, 2014. Upon expiration of the renewal term, the Bank may extend the lease for two successive renewal periods of five years each.
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 July 18, 2014. Upon expiration of the initial term, the Bank may extend the lease for two successive renewal periods of five years each.
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 Carroll Township. The initial term of this lease expired February 28, 2003. However, the Bank has exercised its annual options to renew the lease for an additional one-year term, which options ultimately extend through June 30, 2011. The Bank is currently negotiating new lease terms for this office.
Each of the Bank’s eleven banking offices is a full service office, ten of which provide drive-through teller and automated teller machine services.
ITEM 3.
ITEM 3. Legal Proceedings.
Neither the Corporation nor the Bank is a party to any material pending legal proceeding other than routine legal proceedings incidental to its business.
ITEM 4.
ITEM 4. Removed and Reserved.
PART II
ITEM 5.
ITEM 5. Market for Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Although shares of the Corporation’s common stock are traded from time to time in private transactions and in the over-the-counter market, there is no established public trading market for the stock. The Corporation’s common stock is not listed on any stock exchange or automated quotation system and there are no present plans to so list the stock. There can be no assurance that, at any given time, any persons will be interested in acquiring shares of the Corporation’s common stock. Price quotations for the Corporation’s common stock do not appear regularly in any generally recognized investment media.
The following table reports the highest and lowest per share prices at which the Corporation’s common stock has actually traded in private transactions and in over-the-counter 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 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 Transactions
Known to Corporation
The authorized common stock of the Corporation consists of 10,000,000 shares of common stock, par value $5.00 per share, of which 1,403,761 shares were outstanding at February 25, 2011. The Corporation has 764 shareholders of record as of February 25, 2011.
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 the Corporation to declare dividends on a quarterly basis after considering the Corporation’s 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 on the Corporation’s common stock for the stated periods.
See discussion under “Supervision and Regulation - Dividends” in Item 1 of this Report and Note 11 to the financial statements contained in the Annual Report to Shareholders for the year ended December 31, 2010 for a description of restrictions that may limit the Corporation’s ability to pay dividends on its common stock.
The Corporation has not adopted any compensation plans, including individual compensation arrangements, under which shares of the Corporation’s common stock are authorized for issuance.
On January 8, 2008, the Board of Directors of the Company authorized a stock repurchase program pursuant to which the Company is authorized to purchase up to 7.1% of its outstanding shares or 100,000 shares. Share repurchases will be made from time to time and may be effected through open market purchases, block trades, or in privately negotiated transactions.
The table below sets forth the information with respect to purchases of common stock made by or on behalf of the Corporation or any affiliated purchaser as defined in Rule 240-10b-18(a) (3) under Regulation S-K during the quarter ended December 31, 2010.
ITEM 6.
ITEM 6. Selected Financial Data.
The selected five year financial data, included on page 63 of the Annual Report to Shareholders for the year ended December 31, 2010, attached to this Report as Exhibit 13, is incorporated herein by reference.
ITEM 7.
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Management’s Discussion and Analysis of Financial Conditions and Results of Operations, included on pages 48 through 63 of the Annual Report to Shareholders for the year ended December 31, 2010, attached to this Report as Exhibit 13, is incorporated herein by reference.
ITEM 7A.
ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk.
(Not required of a smaller reporting Company)
ITEM 8.
ITEM 8. Financial Statements and Supplementary Data.
The financial statements included on pages 11 through 47 of the Annual Report to Shareholders for the year ended December 31, 2010 attached to this Report as Exhibit 13, are incorporated herein by reference.
ITEM 9.
ITEM 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
None.
ITEM 9A.
ITEM 9A. Controls and Procedures.
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
The Corporation’s management, with the participation of its President & CEO (Principal Executive Officer) and CFO (Principal Financial Officer), conducted an evaluation, as of December 31, 2010 of the effectiveness of the Corporation’s disclosure controls and procedures (as defined in the Exchange Act Rule 13a-15(e)). Based on this evaluation, the Corporation’s President and CFO concluded that, as of the end of the period covered by this annual report, the Corporation’s disclosure controls and procedures were effective in reaching a reasonable level of assurance that management is timely alerted to material events relating to the Corporation during the period when the Corporation’s periodic reports are being prepared.
There were no significant changes in the Corporation’s internal control over financial reporting that occurred during the period covered by this report that have materially affected, or that are reasonably likely to affect, our internal control over financial reporting.
Report of Management’s Assessment of Internal Control over Financial Reporting
The information required to be disclosed by this item, including the Report of Management’s Assessment of Internal Control over Financial Reporting is included on page 8 of the Annual Report to Shareholders for the year ended December 31, 2010, which is attached to this report as Exhibit 13, and incorporated herein by reference.
This annual report does not include an attestation report of the Corporation’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Corporation’s registered public accounting firm pursuant to provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act which exempt smaller reporting companies from this requirement, thus permitting the Corporation to provide only management’s report in this annual report.
ITEM 9B.
ITEM 9B. Other Information.
None.
PART III
ITEM 10.
ITEM 10. Directors, Executive Officers and Corporate Governance.
The information required by Item 10 concerning the Corporation’s directors and executive officers is incorporated herein by reference from the sections captioned “Election of Directors,” “Biographical Summaries of Nominees and Directors,” “Nominating Process,” “Information about Executive Officers” and “Board Committees and Meeting Attendance - Audit Committee” in the Corporation’s definitive proxy statement for the 2011 Annual Meeting of Shareholders filed pursuant to Regulation 14A. The required information regarding compliance with Section 16(a) of the Exchange Act is incorporated by reference to the section captioned “Section 16(a) Beneficial Ownership Reporting Compliance” in the Corporation’s definitive proxy statement for the 2011 Annual Meeting of Shareholders filed pursuant to Regulation 14A.
The Bank has adopted a code of ethics that applies to its principal executive officer, principal financial officer and other senior officers. Because the Bank’s principal executive officer and principal financial officer also serve, respectively, as the principal executive officer and principal financial officer of the Corporation, the Bank’s code of ethics applies to them in their capacities as officers of the Corporation as well. A copy of the code of ethics is available, without charge, upon written request to Richard R. Leitzel, Chief Financial Officer, First Community Financial Corporation, Two North Main Street, Mifflintown, Pennsylvania 17059.
ITEM 11.
ITEM 11. Executive Compensation.
The information required by Item 11 is incorporated by reference from the sections captioned “Compensation of Directors,” “Executive Compensation Tables,” and “Potential Payments upon Termination,” in the Corporation’s definitive proxy statement for the 2011 Annual Meeting of Shareholders filed pursuant to Regulation 14A.
ITEM 12.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information required by Item 12 is incorporated by reference from the sections captioned “Share Ownership of Certain Beneficial Owners” and “Share Ownership of Management” in the Corporation’s definitive proxy statement for the 2011 Annual Meeting of Shareholders filed pursuant to Regulation 14A.
ITEM 13.
ITEM 13. Certain Relationships and Related Transactions, and Director Independence.
The information required by Item 13 is incorporated by reference from the sections captioned “Transactions with Management” and “Director Independence” in the Corporation’s definitive proxy statement for the 2011 Annual Meeting of Shareholders filed pursuant to Regulation 14A.
ITEM 14.
ITEM 14. Principal Accountant Fees and Services.
The information required by Item 14 is incorporated by reference from the section captioned “Independent Certified Public Accountants” in the Corporation’s definitive proxy statement for the 2011 Annual Meeting of Shareholders filed pursuant to Regulation 14A. Information concerning the policy adopted by the Audit Committee regarding the pre-approval of audit and non-audit services provided by the Corporation’s independent auditors is incorporated by reference from the section captioned “Board Committees and Meeting Attendance - Audit Committee” in the Corporation’s definitive proxy statement for the 2011 Annual Meeting of Shareholders filed pursuant to Regulation 14A.
PART IV
ITEM 15.
ITEM 15. Exhibits, Financial Statement Schedules.
(a) The following documents are filed as a part of this report:
(1) List of financial statements:
The following consolidated financial statements of the Corporation and its subsidiaries, included in the registrant’s annual report to shareholders for the year ended December 31, 2010, are incorporated by reference in Item 8:
Consolidated Balance Sheets: December 31, 2010 and 2009.
Consolidated Statements of Income: Years ended December 31, 2010 and 2009.
Consolidated Statements of Shareholders’ Equity: Years ended December 31, 2010 and 2009.
Consolidated Statements of Cash Flows: Years ended December 31, 2010 and 2009.
Notes to Consolidated Financial Statements.
(2) List of financial statement schedules:
All financial statement schedules for which provision is made under the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and have therefore been omitted.
(3) Exhibits
The exhibits listed on the index to exhibits in Item 15(b) below are filed as part of, or hereby incorporated by reference into, this Form 10-K.
(b) Exhibits:
10.9
Director Deferred Fee Agreement between The First National Bank of Mifflintown and Nancy S. Bratton, dated April 9, 2002. (Incorporated by reference to Exhibit 6(c)(11) to the Corporation’s Registration Statement on Form 10-SB, as filed with the Securities and Exchange Commission on April 17, 2002.)
The form of this Director Deferred Fee Agreement is substantially identical in all material respects (except as to the parties thereto, the dates of execution and other details) with the Director Deferred Fee Agreements between the Bank and the following directors:
10.10
Amended and Restated Director Deferred Fee Agreement between The First National Bank of Mifflintown and Roger Shallenberger, dated October 3, 2008.
10.11
Director Deferred Fee Agreement between The First National Bank of Mifflintown and Jody D. Graybill, dated December 31, 2010 (Incorporated by reference to Exhibit 10.1 to the Corporation’s Current Report on Form 8-K as filed with the Securities and Exchange Commission on January 5, 2011.)
10.12
Amended and Restated Director Revenue Neutral Retirement Agreement between The First National Bank of Mifflintown and Nancy S. Bratton, dated October 3, 2008.
The form of this Amended and Restated Director Revenue Neutral Retirement Agreement is substantially identical in all material respects (except as to the parties thereto, the dates of execution and other details) with the Amended and Restated Director Revenue Neutral Retirement Agreements between the Bank and the following directors:
The form of this First Amendment is substantially identical in all material respects (except as to the parties thereto, the dates of execution and other details) with the First Amendment to the Amended and Restated Director Revenue Neutral Retirement Agreements between the Bank and the following directors:
10.14
Director Revenue Neutral Retirement Agreement between The First National Bank of Mifflintown and Jody Graybill, dated October 29, 2010. (Incorporated by reference to Exhibit 10.2 to the Corporation’s Current Report on Form 8-K as filed with the Securities and Exchange Commission on November 4, 2010.)
The form of this agreement is substantially identical in all material respects (except as to the parties thereto, the dates of execution and other details) with the agreements between the Bank and the following directors:
10.15
Split Dollar Agreement between The First National Bank of Mifflintown and Nancy S. Bratton, dated May 14, 2002.
The form of this Split Dollar Agreement is substantially identical in all material respects (except as to the parties thereto, the dates of execution and other details) with the Split Dollar Agreements between the Bank and the following directors:
The form of this First Amendment is substantially identical in all material respects (except as to the parties thereto, the dates of execution and other details) with the First Amendment to the Split Dollar Agreements between the Bank and the following directors:
10.17
Split Dollar Agreement between The First National Bank of Mifflintown and Jody Graybill, dated October 29, 2010. (Incorporated by reference to Exhibit 10.1 to the Corporation’s Current Report on Form 8-K as filed with the Securities and Exchange Commission on November 4, 2010.)
The form of this agreement is substantially identical in all material respects (except as to the parties thereto, the dates of execution and other details) with the agreements between the Bank and the following directors:
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed by the undersigned, thereunto duly authorized.
FIRST COMMUNITY FINANCIAL CORPORATION
Date: March 8, 2011
By:
/s/ Jody D. Graybill
Jody D. Graybill, President & CEO
(Principal Executive Officer)
Date: March 8, 2011
By:
/s/ Richard R. Leitzel
Richard R. Leitzel, Vice President
(Principal Financial and Accounting Officer)
In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.
EXHIBIT INDEX
10.9
Director Deferred Fee Agreement between The First National Bank of Mifflintown and Nancy S. Bratton, dated April 9, 2002. (Incorporated by reference to Exhibit 6(c)(11) to the Corporation’s Registration Statement on Form 10-SB, as filed with the Securities and Exchange Commission on April 17, 2002.)
The form of this Director Deferred Fee Agreement is substantially identical in all material respects (except as to the parties thereto, the dates of execution and other details) with the Director Deferred Fee Agreements between the Bank and the following directors:
10.12
Amended and Restated Director Revenue Neutral Retirement Agreement between The First National Bank of Mifflintown and Nancy S. Bratton, dated October 3, 2008.
The form of this Amended and Restated Director Revenue Neutral Retirement Agreement is substantially identical in all material respects (except as to the parties thereto, the dates of execution and other details) with the Amended and Restated Director Revenue Neutral Retirement Agreements between the Bank and the following directors:
The form of this First Amendment is substantially identical in all material respects (except as to the parties thereto, the dates of execution and other details) with the First Amendment to the Amended and Restated Director Revenue Neutral Retirement Agreements between the Bank and the following directors:
10.14
Director Revenue Neutral Retirement Agreement between The First National Bank of Mifflintown and Jody Graybill, dated October 29, 2010. (Incorporated by reference to Exhibit 10.2 to the Corporation’s Current Report on Form 8-K as filed with the Securities and Exchange Commission on November 4, 2010.)
The form of this agreement is substantially identical in all material respects (except as to the parties thereto, the dates of execution and other details) with the agreements between the Bank and the following directors:
10.15
Split Dollar Agreement between The First National Bank of Mifflintown and Nancy S. Bratton, dated May 14, 2002.
The form of this Split Dollar Agreement is substantially identical in all material respects (except as to the parties thereto, the dates of execution and other details) with the Split Dollar Agreements between the Bank and the following directors:
The form of this First Amendment is substantially identical in all material respects (except as to the parties thereto, the dates of execution and other details) with the First Amendment to the Split Dollar Agreements between the Bank and the following directors:
10.17
Split Dollar Agreement between The First National Bank of Mifflintown and Jody Graybill, dated October 29, 2010. (Incorporated by reference to Exhibit 10.1 to the Corporation’s Current Report on Form 8-K as filed with the Securities and Exchange Commission on November 4, 2010.)
The form of this agreement is substantially identical in all material respects (except as to the parties thereto, the dates of execution and other details) with the agreements between the Bank and the following directors: