10-Q 1 form10q41415_11-9.txt Securities and Exchange Commission Washington, D.C. 20549 Form 10-QSB QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT 0F 1934 FOR THE QUARTERLY PERIOD ENDED September 30, 2001 Commission file number 000-26117 FIRST COMMUNITY FINANCIAL CORPORATION -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) NORTH CAROLINA 56-2119954 -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 708 SOUTH CHURCH STREET, BURLINGTON, N.C. 27215 -------------------------------------------------------------------------------- (Address of principal executive offices) 336-229-2744 -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) NOT APPLICABLE -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ---------- ---------- 1,616,483 common shares, no par value, were outstanding as of October 20, 2001. FIRST COMMUNITY FINANCIAL CORPORATION AND SUBSIDIARY INDEX Page PART I FINANCIAL INFORMATION Number Item 1 Financial Statements Condensed Consolidated Balance Sheets 1 September 30, 2001 and December 31, 2000 Condensed Consolidated Statements of Income 2 Three and nine months ended September 30, 2001 and 2000 Condensed Consolidated Statements of Comprehensive Income 3 Three and nine months ended September 30, 2001 and 2000 Condensed Consolidated Statements of Cash Flow 4 Nine months ended September 30, 2001 and 2000 Notes to Condensed Consolidated Financial Statements 5-6 Item 2 Management's Discussion and Analysis of Financial Condition 7-15 and Results of Operations PART II OTHER INFORMATION Item 1 Legal Proceedings 16 Item 2 Changes in Securities and Use of Proceeds 16 Item 3 Defaults Upon Senior Securities 16 Item 4 Submission to Matters to a vote of Security Holders 16 Item 5 Other Information 16 Item 6 Exhibits and Reports on Form 8-K 16 PART I. FINANCIAL INFORMATION Item 1. Financial Statements First Community Financial Corporation Condensed Consolidated Balance Sheets (dollars in thousands)

See accompanying notes to condensed consolidated financial statements 1 Item 1. Continued First Community Financial Corporation Condensed Consolidated Statements of Income (Loss) (unaudited) (dollars in thousands)

See accompanying notes to condensed consolidated financial statements 2 Item 1. Continued First Community Financial Corporation Condensed Consolidated Statements of Comprehensive Income (Loss) (unaudited) (dollars in thousands)

See accompanying notes to condensed consolidated financial statements 3 Item 1. Continued First Community Financial Corporation Condensed Consolidated Statements of Cash Flows (unaudited) (dollars in thousands)

See accompanying notes to condensed consolidated financial statements 4 Item 1. Continued First Community Financial Corporation Notes to Condensed Consolidated Financial Statements 1. Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim information and with the instructions to FORM 10-Q SB. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been Included. Operating results for the periods presented are not necessarily indicative of the results that may be expected for the year ended December 31, 2001. 2. Conversion from Mutual to Stock form of Ownership On June 14, 1999, members of Community Savings Bank, SSB eligible to vote at a a special meeting, voted to approve the conversion of Community Savings Bank, SSB. The conversion involved the transformation of Community Savings Bank, SSB from mutual to stock form, First Community's acquisition of all of the outstanding capital stock of Community Savings Bank, SSB and First Community's sale of its common stock to the depositors and borrowers of Community Savings Bank, SSB and other persons who had the right to purchase shares. The sale was completed June 21,1999, and First Community Financial Corporation began trading on June 21,1999 on the NASDAQ national markets exchange under the symbol "FCFN". 1,880,798 shares of no par common stock were issued raising $25.2 million of net proceeds. 3. Analysis of Allowance for Loan Loss Nine months ended September 30, ------------------------------- 2001 2000 ----------- ------------ (in thousands) Beginning balance $ 2,353 $ 1,839 Provision for loan loss 540 305 Net charge-offs (435) (200) ------- ------- Balance, end of period $ 2,458 $ 1,944 ======= ======= Ratio of net charge-offs to average loans outstanding 0.27% 0.12% Ratio of allowance to total loans outstanding 1.62% 1.11% at end of period Ratio of allowance to total nonperforming assets at end of period 108.66% 116.97% 5 4. Net Income (Loss) Per Share of Common Stock Basic income (loss) per share of common stock is computed by dividing net income (loss) by the weighted average number of common shares outstanding (less unearned ESOP shares and unearned stock grants) during the period. Diluted net income (loss) per share of common stock is computed by dividing net income (loss) by the weighted average number of common shares and common stock equivalents outstanding during the period. For the nine month period ended September 30, 2001, the weighted average number of shares outstanding was 1,434,860. The effect, if any, on diluted earnings per share of future periods of the stock awards described in note 5 will be computed under the treasury stock method. 5. Stock Grant Awards On June 27, 2000, the Company awarded 75,232 shares of stock to directors and employees under the Community Savings Bank, Inc., Management Recognition Plan and Trust, approved by shareholders on June 27, 2000. In accordance with the provision of Accounting Principles Board Opinion No. 25, the Company will recognize the cost of the awards over the vesting period. One-fourth of the shares were immediately vested upon award, and the remainder will vest over the following 36 months. The Company acquired 75,232 shares from the public for an aggregate amount of $1,297,752. The results for the nine months ended September 30, 2001 included expense of $214,610 related to their award. 6. Subsequent Event On October 4, 2001, the Company entered into an agreement to be acquired by Capital Bank Corporation, Raleigh, NC. The transaction is expected to be completed during the first quarter of 2002. 6 PART I. FINANCIAL INFORMATION Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Forward Looking Statements Information set forth below contains certain forward-looking statements, which are based on assumptions, and describes future plans, strategies and expectations of First Community Financial Corporation ("First Community" or "the company"). These forward-looking statements are generally identified by use of the words "believe", "expect", "intend", "anticipate", "estimate", "project", or similar expressions. First Community's ability to predict results or the actual effect of future plans and strategies is inherently uncertain. Factors which could have a materially adverse effect on the operations of First Community and its wholly owned subsidiary, Community Savings Bank, Inc. ("Community Savings") include, but are not limited to, changes in: interest rates, general economic conditions, legislation and regulation, monetary and fiscal policies of the U.S. Government including policies of the U.S. Treasury and the Federal Reserve Board, the quality or composition of the loan or investment portfolios, demand for loan products, deposit flows, competition, demand for financial services in its market area and accounting principles and guidelines. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Financial Condition At September 30, 2001 Compared to December 31, 2000 Total assets increased 3.1% to $211.0 million at September 30, 2001, compared to $204.7 million at December 31, 2000. The increase in assets was principally a result of a $23.9 million increase in securities and overnight investments and a $2.4 million increase in loans held for sale, offset by a $19.7 million decrease in loans held for investment, net of reserves. Loans held for investment, net of reserves, decreased 11.9% at September 30, 2001 to $146.5 million from the December 31, 2000 balance of $166.2 million. The loan portfolio decrease in outstanding balances is the result of a slower economic environment and management's decision to sell most new originations of single family mortgages into the secondary market to reduce interest rate risk and market risk. At September 30, 2001, approximately 54.4% of the Community Savings' gross loan portfolio consisted of loans secured by one- to- four family residential properties. At December 31, 2000, 58.1% of gross loans were secured by 1-4 family residential properties. Loan production continued to emphasize commercial and consumer credits in an effort to diversify the loan portfolio and reduce the reliance on single family 1-4 residential loans. Commercial loans increased 11% or $4.5 million, compared to December 31, 2000. 7 Securities increased 94.1% at September 30, 2001 to $40.1 million compared to the December 31, 2000 balance of $20.7 million. The increase in securities was primarily incurred to offset the 11.9% decrease in loans held for investment. The nine-month average balance of securities decreased 47.1 % for the period ended September 30, 2001 to $29.5 million compared to the $55.8 million average balance of securities for the nine month period ended September 30, 2000. The average balance for 2000 reflected a match funded leveraged securities transaction in the amount of $25 million that was removed during the 4th quarter of 2000. Deposits decreased to $156.2 million at September 30, 2001 from $157.3 million at December 31, 2000, a decrease of 1%. Local deposit competition is very strong causing upward pressure on deposit interest rates. Borrowed funds, collateralized through an agreement with the Federal Home Loan Bank ("FHLB"), increased to $6.3 million at September 30, 2001 from $0 at December 31, 2000. FHLB borrowings of $1.3 million float with one-month LIBOR index and mature June 30, 2002. The floating rate borrowings are matched with a commercial loan with similar characteristics. The remaining $5 million of FHLB borrowings are fixed rate proceeds used to facilitate normal loan growth and deposit fluctuations. The fixed rate borrowings mature March 31, 2003. Asset Quality First Community's non-performing assets (loans 90 days or more delinquent and fore- closed real estate and repossessed assets) were $2.3 million, or 1.07% of total assets, at September 30, 2001, compared to $2.4 million, or 1.16% of total assets, at December 31, 2000. Loans totaling $469 thousand were charged off against the allowance for loan losses, partially off set by recoveries on previously charged-off loans of $34 thousand. Net loans charged-off against the allowance for loan losses totaled $435 thousand or 0.27% of average loans outstanding. Management performs a four-step procedure in determining the appropriate level for the allowance for loan losses. First, at the end of each quarter, loan department personnel perform a review of the bank's loan portfolio. Individual loans are assigned an internal classification designation of unclassified, substandard, doubtful, or loss based on historical performance and specific circumstances known to the bank regarding the financial situation of the customer. Next, impaired loans are identified and a determination is made as to the necessity of creating a specific allowance. Any impairment allowance is based on the expected cash flows or the fair market value of available collateral for collateral dependent loans. There were no impaired loans at September 30, 2001. Therefore, an allowance for impaired loans was unnecessary. Next, the substandard and doubtful classifications are analyzed and a risk percentage is determined considering each type of loan and the severity of any probable loss. All loans categorized as "loss" are fully reserved. The final procedure is to assign risk percentages to unclassified loans based on historical and industry information regarding probable, yet unidentifiable, losses inherent in the portfolio. Industry factors are adjusted to reflect 8 individual bank circumstances. Since First Community is entering new lines of business with little past experience to draw on in the areas of commercial, construction and consumer lending, an entry period of higher than industry norm loss is reflected in the risk percentages assigned these loan categories. In the opinion of management, the general allowance for loan losses of $2.5 million at September 30, 2001 was adequate to cover probable losses. Results of Operation for the three month periods ended September 30, 2001 and 2000 Net income is influenced significantly by the performance of net interest income. Net interest income is the difference between interest income (derived from revenues generated from loans, investments and other earning-assets), and interest expense (consisting principally of interest paid on deposits and borrowings). Operations may be materially affected by national and international economic conditions, monetary and fiscal policies of the Federal government, and policies of regulatory authorities. NET INCOME Net income of $327 thousand was recorded for the three month period ended September 30, 2001, compared to net income of $328 thousand for the three month period ended September 30, 2000. Net interest income before the provision for loan losses increased 2.64% or $50 thousand for the period ended September 30, 2001. Interest income decreased 15.4% or $680 thousand for the three months ended September 30, 2001, which was offset by $730 thousand decrease in interest expense or 28.9% for the same period. Net interest income after the loan loss provision decreased 11.5%, or $205 thousand, reflecting management's decision to increase the provision for loan losses to $360 thousand for the three months ended September 30, 2001. Other operating income increased $689 thousand due primarily to a one-time gain on the sale of mortgage servicing rights in the amount of $674 thousand, net of amortized costs. Other operating expense increased $369 thousand or 25.4% reflecting $170 thousand in one-time merger related expenses, $50 thousand increase in repossessed asset expense, $26 thousand increase in data processing expense and $19 thousand increase in advertising expense. INTEREST INCOME Interest income decreased 15.4% or $680 thousand for the three months ended September 30, 2001 to $3.7 million compared to $4.4 million for the three months ended September 30, 2000. The decrease in interest income is two fold. Interest and fees on loans decreased 9.1% or $311 thousand reflecting a decrease in average loan balances of 8.65% for the three-month period ended September 30, 2001. Interest income on investments decreased 36.5% or $369 thousand resulting from a $15.1 million reduction in securities balances outstanding compared to securities balances outstanding at September 30, 2000. The average balance on total interest-earning assets decreased 9.5% or $21 million for the three months ended September 30, 2001 compared to average balances during the same 9 period in 2000. The decreases resulted primarily from a $15.1 million decrease in investment average balances due to the removal of a match funded leveraged investment transaction during the 4th quarter of 2000, and a $14.6 million decrease in net loan average balances. The average annualized yield on total average interest-earning assets decreased 52 basis points from the 2000 three month period, reflecting a decrease in the annualized yield on investments of 112 basis points and a decrease in annualized loan yields of 4 basis points. INTEREST EXPENSE Interest expense decreased 28.9% or $730 thousand to $1.8 million for the three months ended September 30, 2001 compared to $2.5 million for the three months ended September 30, 2000. The decrease in interest expense was a result of a 13.4% decrease in interest expense on deposits. A $464 thousand decrease in interest expense on FHLB borrowing reflects the significant reduction in FHLB advances resulting from the removal of a match funded structured investment transaction during the 4th quarter of 2000. The average balance of interest-bearing liabilities decreased 13.1% or $24.2 million for the three months ended September 30, 2001 compared to average balances for the same period in 2000. The average annualized cost on total average interest-bearing liabilities decreased 100 basis points from the 2000 three month period, resulting from an decrease in the annualized rate on FHLB borrowings of 208 basis points and an decrease in annualized deposit costs of 184 basis points. NET INTEREST INCOME Net interest income before the provision for loan losses, for the three-month period ended September 30, 2001, compared to the three-month period ended September 30, 2000 decreased $50 thousand, reflecting a $680 thousand decrease in interest income offset by a $730 thousand decrease in interest expense. Comparable spreads and net interest margins were as follows:

10 PROVISION FOR LOAN LOSSES A provision of $360 thousand was added to the allowance for loan losses, increasing the period end balance to $2.5 million or 1.62% of outstanding loans at September 30, 2001. A provision of $105 thousand was added to the allowance for loan losses for the three-month period ending June 30, 2000. The increase to the allowance reflects the significant change in the loan portfolio composition, the charge-offs in the third quarter, and current economic conditions. NON-INTEREST INCOME Non-interest income increased $689 thousand to $835 thousand for the three-month period ended September 30, 2001 compared to $146 thousand for the three-month period ended September 30, 2000. The increase in non-interest income for the 2001 period is primarily due to non-recurring gains on the sale of mortgage servicing rights in the amount of $674 thousand, net of amortized costs, realized in the third quarter of 2001. NON-INTEREST EXPENSE Non-interest expense increased 25.4% or $369 thousand to $1.8 million for the three months ended September 30, 2001 compared to $1.5 million for the three-month period ended September 30, 2000 reflecting $170 thousand in one-time merger related expenses, $50 thousand increase in repossessed asset expense, $26 thousand increase in data processing expense and $19 thousand increase in advertising expense. INCOME TAXES The income tax provision for the three month period ended September 30, 2001 was $272 thousand compared to $156 thousand for the three months ended September 30, 2000, an increase of $116 thousand from the prior year period. The increase in the tax provision is the result of increases in earnings before income taxes as well as certain expenses related to the proposed merger that are not be deductible for tax purposes for the three month period ended September 30, 2001. The effective tax rates for the respective 2001 and 2000 periods were 45.3% and 32.2%. Results of Operation for the nine month periods ended September 30, 2001 and 2000 NET INCOME Net income for the nine months ended September 30, 2001 was $721 thousand, a decrease of $409 thousand compared to the nine-month period ended September 30, 2000. Net income for the nine-month period ended September 30, 2000 was $1.1 million. 11 INTEREST INCOME Interest income decreased $1.6 million or 12.7% for the nine months ended September 30, 2001 to $11.4 compared from $13 million for the nine months ended September 30, 2000. The decrease in interest income can be principally attributed to a $25.4 million decrease in the average balance of interest earning assets from 2000 to 2001, and a decrease in the average annualized yield on interest earning assets from 7.80% to 7.68%. INTEREST EXPENSE Interest expense decreased 18% or $1.3 million for the nine months ended September 30, 2001 compared to the nine months ended September 30, 2000. The decrease in interest expense was principally a result of a 176 basis point decrease in the cost of borrowings from the Federal Home Loan Bank. The aggregate annualized cost of interest bearing liabilities decreased 28 basis points. The average balance outstanding of interest bearing liabilities decreased $24.5 million from $181.9 million at September 30, 2000 to $157.4 million at September 30, 2001, a decrease of 13.5%. The average outstanding balance for interest bearing deposits increased $2.5 million to $152 million at September 30, 2001 from $149.5 million at September 30, 2000. Average FHLB borrowings decreased to $5.4 million at September 30, 2001 from $32.4 million at September 30, 2000 or 83.3%. NET INTEREST INCOME Net interest income before the provision for loan losses, for the nine month period ended September 30, 2001, decreased 6.3% or $369 thousand compared to the nine month period ended September 30, 2000. The primary components affecting the change in net interest income were a 12.7% decrease in interest income offset by an 18% decrease in interest expense. Comparable spreads and net interest margins were as follows:

12 PROVISION FOR LOAN LOSSES A provision of $540 thousand was added to the allowance for loan losses, increasing the period end balance to $2.5 million or 1.62% of outstanding loans at September 30, 2001. A provision of $305 thousand was added to the allowance for loan losses for the period ending September 30, 2000. The increase to the allowance reflects the significant change in the loan portfolio composition, the charge-offs in 2001, and the current national and local economic enviornment. NON-INTEREST INCOME Non-interest income increased $711 thousand to $1.2 million for the nine month period ended September 30, 2001 compared to the nine month period ended September 30, 2000. The increase in non-interest income for the 2001 period is primarily due to non-recurring gains on the sale of mortgage servicing rights in the amount of $674 thousand dollars, net of amortized costs, realized in the third quarter of 2001. Although management is encouraged by the increase in non-interest income, continued emphasis will be placed on improving non-interest income revenue. NON-INTEREST EXPENSE Non-interest expense increased 12.2% or $532 thousand for the nine months ended September 30, 2001 compared to the nine month period ended September 30, 2000. The increase in non-interest expense was due primarily to $170 thousand in one-time merger related expenses, $50 thousand increase in repossessed asset expense, $112 thousand increase in data processing expense and $30 thousand increase in furniture and fixture expense. INCOME TAXES Income tax expense for the nine month period ended September 30, 2001 was $514 thousand compared to a tax provision of $530 thousand for the nine months ended September 30, 2000, a decrease of $16 thousand from the prior year. The decrease in the tax provision was principally a result of a decrease in income before income tax. The average tax rate for the nine months ended September 30, 2001 and 2000 were 41.6% and 31.9%, respectively. The tax provision takes into consideration certain expenses related to the proposed merger that are not be deductible for tax purposes for the nine month period ended September 30, 2001 LIQUIDITY The Company's policy is to maintain adequate liquidity to meet continuing loan demand and withdrawal requirements while paying normal operating expenses and satisfying regulatory liquidity guidelines. Maturing securities, principal repayments of loans and securities, deposits, income from operations and borrowings are the main sources of 13 liquidity. Short-term investments (overnight investments with the Federal Home Loan Bank and Federal Funds Sold) and short-term borrowings (Federal Home Loan Bank advances, Repurchase Agreements and Federal Funds Purchased) are the primary cash management liquidity tools. The investment portfolio provides secondary liquidity. At September 30, 2001, the estimated market value of liquid assets (cash, cash equivalents, and marketable securities) was approximately $51.5 million, representing 31.7% of deposits and borrowed funds. As Community Savings continues to grow its loan portfolio, liquidity will continue to be leveraged. The primary uses of liquidity are to fund loans, provide for deposit fluctuations and invest in other non-loan earning assets when excess liquidity is available. At September 30, 2001, outstanding off-balance sheet commitments to extend credit in the form of loan originations totaled $3.4 million. Available lines of credit totaled $20.3 million. Management considers current liquidity levels adequate to meet the Company's cash flow requirements. CAPITAL Shareholders' equity at September 30, 2001 was $44.4 million, an increase of $936 thousand or 2.2% from $43.4 million at December 31, 2000. Included in shareholder's equity at September 30, 2001 was $158 thousand, net of tax, of accumulated other comprehensive income related to unrealized gains on securities available for sale compared to $253 thousand of accumulated other comprehensive loss related to unrealized losses on securities available for sale at December 31, 2000. Also included in shareholder's equity at September 30, 2001 was $1.9 million of unearned common stock for the Employee Stock Ownership Plan, representing 127,672 shares of common stock. FDIC regulations require banks to maintain certain capital adequacy ratios, leverage ratios and risk-based capital ratios. Banks supervised by the FDIC must maintain a minimum leverage ratio of core (Tier I) capital to average adjusted assets ranging from 3% to 5%. At September 30, 2001, Community Savings' ratio of Tier I capital to average assets was 15.9%. The FDIC's risk-based capital guidelines require banks to maintain risk-based capital to risk-weighted assets of at least 8%. Risk-based capital for Community Savings is defined as Tier I capital and the reserve for loan losses. At September 30, 2001, Community Savings had a ratio of qualifying total capital to net risk-weighted assets of 28.2%. First Community is also subject to capital adequacy guidelines of the Board of Governors of the Federal Reserve (the "Federal Reserve Board"). Capital requirements of the Federal Reserve Board are similar to those of the FDIC. First Community significantly exceeds regulatory capital requirements. Management anticipates that the Company will continue to exceed capital adequacy requirements without altering current operations or strategies. 14 Recent Events On October 4, 2001 the Company entered into an agreement to be acquired by Capital Bank Corporation, Raleigh, NC. The transaction is expected to be completed in the first quarter of 2002. The combined institutions will have total assets of more than $600 million and eighteen banking locations in seven counties. Recent Accounting Pronouncements The FASB has issued Statements of Financial Accounting Standards No. 141 (FAS 141), Business Combinations, and No. 142 (FAS 142), Goodwill and Other Intangible Assets. FAS 141 supersedes APB Opinion No. 16, Business Combinations, and FASB Statement No. 38, Accounting for Preacquisition Contingencies of Purchased Enterprises and requires that all business combinations be accounted for using the purchase method. This Statement carries forward without reconsideration those portions of APB Opinion No. 16, Business Combinations, that provide guidance related to the application of the purchase method. This Statement requires that intangible assets that meet certain criteria be recognized as assets apart from goodwill. The provisions of this Statement apply to all business combinations initiated after June 30, 2001. This Statement also applies to all business combinations accounted for using the purchase method for which the date of acquisition is July 1, 2001, or later. FAS 142 addresses financial accounting and reporting for acquired goodwill and other intangible assets and supersedes APB Opinion No. 17, Intangible Assets. It addresses how intangible assets that are acquired individually or with a group of other assets (but not those acquired in a business combination) should be accounted for in financial statements upon their acquisition. This Statement also addresses how goodwill and other intangible assets should be accounted for after they have been initially recognized in the financial statements. This Statement carries forward without reconsideration those provisions of Opinion 17 related to the accounting for internally developed intangible assets. The provisions of this Statement are required to be applied starting with fiscal years beginning after December 15, 2001 and early application is permitted for entities with fiscal years beginning after March 15, 2001, under certain conditions. Impairment losses for goodwill and indefinite-lived intangible assets that arise due to the initial application of this Statement (resulting from a transitional impairment test) are to be reported as resulting from a change in accounting principle. In June 2001, the FASB issued Statement 143, Accounting for Asset Retirement Obligations. FAS 143 requires that obligations associated with the retirement of a tangible long-lived asset to be recorded as a liability when those obligations are incurred, with the amount of the liabilty initially measured at fair value. FAS 143 will be effective for financial statements for fiscal years beginning after June 15, 2002 (early application is incouraged). Adoption of this statement is not expected to have a material impact on the company's reported results of operations, financial position or cash flows. In July 2001, the (FASB) issued Statement No. 144 (FAS 144) Accounting for Impairment or Disposal of Long-Lived Assets. FAS 144 superseeds FAS1 121 and applies to all long-lived assets (including discontinued operations) and consequently amends Accounting Principles Board Opinion No. 30 (APB 30), Reporting Results of Operations Reporting the Effects of Disposal of a Segment of Business. FAS 144 requires that long-lived assets that are to be disposed of by sale be measured at the lower of book value or fair value less cost to sell. FAS 144 is effective for financial statements issued for fiscal years beginning after December 15, 2001 and generally, its provisions are to be applied prospectively. Adoption of this statement is not expected to have a material impact on the Company's reported results of operations, financial position or cash flows. The Company is currently evaluating the effect of adopting these pronouncements. 15 Part II - Other Information Item 1 Legal proceedings. None. Item 2 Changes in Securities and Use of Proceeds. (a) Not applicable (b) Not applicable (c) Not applicable (d) Not applicable Item 3 Defaults upon Senior Securities Not applicable. Item 4 Submission of Matters to a vote of securities holders. None. Item 5 Other information. Not applicable. Item 6 Exhibits and reports on form 8-K. (a) Exhibits (b) Reports on Form 8-K. A form 8-K was filed on October 12, 2001 to announce the signing of a merger agreement between First Community Financial Corporation, Burlington, NC, and Capital Bank Corporation, Raleigh, NC. 16 SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. First Community Financial Corporation ------------------------------------- Registrant Date 11/2/2001 /S/ Christopher B. Redcay ---------------- ------------------------------------- Christopher B. Redcay Sr. Vice President, Treasurer and Chief Financial Officer

FIRST COMMUNITY FINANCIAL CORP /NC/ 10-Q