Exhibit 13

FIRST COMMUNITY

FINANCIAL CORPORATION

2011

Annual Report

	Page
Management’s Letter to Shareholders and Performance Data		2-3
Being your Partners: Yesterday, Today & Tomorrow		4-7
Management’s Assessment of Internal Control Over Financial Reporting		8
Report of Independent Registered Public Accounting Firm		9
December 31, 2011 and 2010 Consolidated Balance Sheets:		10
Years ended December 31, 2011 and 2010 Consolidated Statements of Income:		11
Years ended December 31, 2011 and 2010 Consolidated Statements of Shareholders’ Equity:		12
Years ended December 31, 2011 and 2010 Consolidated Statements of Cash Flows:		13
Notes to Consolidated Financial Statements		14-48
Management’s Discussion and Analysis of Financial Condition and Results of Operations		49-64
Board of Directors:
First Community Financial Corporation		65
Officers:
First Community Financial Corporation		66
Officers:
The First National Bank of Mifflintown		67
Directors Emeriti and Advisory Boards		68
Bank, Loan Production and Trust & Investment Services Offices in Juniata County and Perry County		69
Stock and Dividend Information		70

1

MANAGEMENT’S LETTER TO SHAREHOLDERS

Dear Shareholder:

During the past year of ongoing economic turmoil, the word “partner” certainly defines what separates the role of community banks. It is defined as “one that shares” or “one associated with another especially in an action”. In our role, we strive to share our knowledge and financial experience with our customers to help them succeed. We also share our personal time and financial resources in the communities we serve.

Balancing the needs of an ever-changing customer base remains important to us as we maintain personal contacts, while seeing our electronic channels grow. Our focus on prudently diversifying our product line in lending and other areas, such as adding annuities and insurance, continues to allow us to develop relationships and business opportunities in the current environment. Training and educational investments with our staff supplement the products and services in our strategy to bring a wide range of services to our area through people our customers know and trust. We remain diligent in our efforts to remain efficient as well, during challenging business conditions.

Therefore, we are pleased to report the following for 2011:

• Net income increased $460,000, or 13%, to $4,146,000.

• Assets added over $ 14 million to $387,883,000.

• Gross Loans grew $12 million.

• Deposits expanded $13 million.

• Return on equity was 13.80%.

• Return on assets was 1.10%

• Dividends increased 11%.

As we look toward 2012, we look forward to finding new partners in the Newport area and Mifflin County, as well as within our current markets. Our Newport Office grand opening in February, 2012 was very successful, while introducing us to many new people.

The efforts of our Board of Directors, Advisory Boards, Directors Emeriti, officers and employees, including the work of those who came before us, are instrumental in our progress.

Your investment and support is greatly appreciated. For additional information concerning our stock or other matters, please feel free to contact us by telephone at 717-436-2144, toll-free at 866-950-2144 or online at www.fnbmifflintown.com.

John P. Henry III	Jody D. Graybill
Chairman	President and Chief Executive Officer

2

Performance Data - 2006 – 2011

FCFC Assets

FCFC Assets

$425,000,000 $387,883,000

$325,000,000

$278,520,000

$225,000,000

2005 2006 2011 2010

Increase - $109,363,000 Percent - 39%

FCFC ROA

1.25%

1.10%

1.00%

0.75%

0.72%

0.50%

0.50%

2006 2011

Increase - 0.38% Percent - 53%

FCFC Net Loans

$300,000,000 FCFC Loans net ALLL

$200,000,000

$200,000,000 $177,930,000

$100,000,000

Increase -2006 $74,431,000 Percent 2011 - 46%

Increase - $69,773,000 Percent - 39%

FCFC Net Income

FCFC Net Income

$4,500,000 $4,146,000

$3,500,000 $1,500,000

$2,500,000 $1,965,000

$1,500,000

2006 2011

Increase - $2,181,000 Percent - 102%

FCFC ROE

FCFC ROE

15.00% 13.80%

10.50% 10.00%

5.00%

2006 2011

Increase - 3.30% Percent - 31%

FCFC Dividend

FCFC Dividend

$1.00

500 $0.390

000 2005 2010

$0.00

Increase - $0.32 Percent - 74%

3

Being Your Partner: Yesterday, Today & Tomorrow

Perry County Council of the Arts

(L-R) Roger Smith, Executive Director of Perry County Council of the Arts accepting a check from Jody Graybill, President and Chief Executive Officer.

Perry Printing

(L-R) Audra Hunter, Assistant Vice President and Community Office Manager of the Newport Office, pictured with Lori McClellan, owner of Perry Printing in New Bloomfield

Day of Caring

(L-R) Bobbi Leister, Corporate Relations/Marketing Officer, Diane Zeiders, Assistant Vice President and Community Office Manager of the Tuscarora Valley and East Waterford Offices, Nanci Aumiller, Assistant Vice President and Operations Manager/BSA/AML and Security Officer, J. Neal Shawver, Assistant Vice President and Credit Analyst, Roy Leister Jr., Assistant Vice President and Community Office Manager of the Delaware Office, K. Lee Hopkins, Senior Vice President and Chief Lending Officer, and Richard Leitzel, Vice President and Chief Financial Officer.

4

Being Your Partner: Yesterday, Today & Tomorrow

Verizon Wireless

(L-R) Kim Mills, Community Office Manager of the Bloomfield Borough and New Bloomfield Offices, pictured with Chris F. Deardorff, owner of the Verizon Wireless store in the Sherman’s Dale plaza.

Ickesburg Beverage

(L-R) Keith and Deb Stouffer (with Truman and

Bella), owners of Ickesburg Beverage, pictured with Billie Jo Deiter, Community Office Manager of the Ickesburg Office.

Economics of Pennsylvania

(L-R) Kimberly Benner, Vice President and Trust and Investment Services Division Manager, Diane Sykes, Assistant Vice President and Trust Officer, Carolyn Shirk, Vice President of Economics of Pennsylvania, and Adam Truitt, Trust Officer.

J.W. Smith Auto Body

(L-R) Brad Sherman, Assistant Vice President and Community Office Manager of the West Perry and Loysville Offices, pictured with Andy and Jay Smith of J.W. Smith Auto Body in Elliottsburg.

5

Being Your Partner: Yesterday, Today & Tomorrow

Lewistown Hospital School of Nursing

(L-R) Chris Meals, Assistant Vice President and Community Office Manager of the Mifflintown Office, presenting a check to Mary Alyce Nelson, MSN, RN, Director of Lewistown Hospital School of Nursing.

Creme Stop

(L-R) Roy Leister Jr., Assistant Vice President and Community Office Manager of the Delaware Office, Kathy and Matthew Stroup, owners of the Creme Stop in McAlisterville, and Anna and Wyatt.

Meals on Wheels

(L-R) Diane Marshall, Juniata County Meals on Wheels Treasurer, receiving a check from Flo Dressler, Assistant Vice President and Community Office Manager of the Fermanagh Office.

Officers

(L-R) Nanette Stake, Vice President, IT Manager and IT Security Officer, Jennifer Kauffman, Executive Assistant and Assistant Secretary, and Matthew Ford, Vice President and Chief Risk Officer.

6

Being Your Partner: Yesterday, Today & Tomorrow

Juniata County Conservation District

(L-R) Jim Cordell, Vice President and Credit Administration Manager, Chris Snyder, District Manager for the Juniata County Conservation District, and Scott Fritz, Vice President and Commercial Loan Officer.

Pool Day

(L-R) Ed Beaver and Don Bratton, Representatives of the Central Juniata Park Pool, receiving a check from Timothy Stayer, Vice President/Marketing and Community Banking Services Division Manager.

Landisburg Youth Baseball Association

(L-R) Jennifer Wilson, Credit Analyst for FNBM and Treasurer of the Landisburg Youth Baseball Association, pictured with Ryan Russell, President of Landisburg Youth Baseball Association.

7

REPORT OF MANAGEMENT’S ASSESSMENT OF INTERNAL CONTROL OVER FINANCIAL REPORTING

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

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

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

Management assessed the Corporation’s system of internal control over financial reporting as of December 31, 2011, in relation to the criteria for effective control over financial reporting as described in “Internal Control – Integrated Framework,” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management concludes that, as of December 31, 2011, its system of internal control over financial reporting is effective and meets the criteria of the “Internal Control – Integrated Framework.”

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

/s/ Jody D. Graybill        

Jody D. Graybill

President and Chief Executive Officer

(Principal Executive Officer)

/s/ Richard R. Leitzel

Richard R. Leitzel

Vice President and Chief Financial Officer

(Principal Financial Officer)

March 8, 2012

8

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of

First Community Financial Corporation

Mifflintown, Pennsylvania

We have audited the accompanying consolidated balance sheets of First Community Financial Corporation and its subsidiaries as of December 31, 2011 and 2010, and the related consolidated statements of income, changes in shareholders’ equity, and cash flows for each of the years then ended. First Community Financial Corporation’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of First Community Financial Corporation and its subsidiaries as of December 31, 2011 and 2010 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.

Chambersburg, Pennsylvania

March 8, 2012

9

FIRST COMMUNITY FINANCIAL CORPORATION

CONSOLIDATED BALANCE SHEETS

	December 31,
	2011			2010
	(In Thousands, Except Share Data)
ASSETS
Cash and due from banks	$	9,129		$	10,280
Interest-bearing demand deposits		218			264
Federal funds sold		591			10
Cash and Cash Equivalents		9,938			10,554
Time certificates of deposit		198			198
Securities available for sale		73,804			75,627
Securities held to maturity, fair value 2011 $36,639; 2010 $30,976		34,972			31,872
Loans		251,012			238,596
Less: Allowance for loan losses		(3,085	)		(2,154	)
Less: Deferred loan fees and costs, net		(224	)		(211	)
Net loans		247,703			236,231
Premises and equipment, net		7,461			5,802
Restricted investment in bank stocks		2,121			2,541
Investment in life insurance		7,399			7,109
Other assets		4,287			4,221
Total Assets	$	387,883		$	374,155
LIABILITIES AND SHAREHOLDERS’ EQUITY
LIABILITIES
Deposits:
Non-interest bearing	$	35,994		$	31,910
Interest-bearing		294,555			285,939
Total Deposits		330,549			317,849
Short-term borrowings		2,685			4,030
Long-term debt		15,000			16,000
Junior subordinated debt		5,155			5,155
Other liabilities		3,056			2,839
Total Liabilities		356,445			345,873
COMMITMENTS AND CONTINGENCIES		—			—
SHAREHOLDERS’ EQUITY
Preferred stock, without par value; 10,000,000 shares authorized and unissued		—			—
Common stock, $5 par value; 10,000,000 shares authorized; Shares issued, 2011 – 1,411,526; 2010 – 1,407,412 Shares outstanding, 2011 – 1,407,870; 2010 – 1,403,761		7,058			7,037
Capital in excess of par value		522			415
Retained earnings		22,652			19,560
Treasury stock, at cost 2011 – 3,656 shares; 2010 – 3,651 shares		(110	)		(110	)
Accumulated other comprehensive income		1,316			1,380
Total Shareholders’ Equity		31,438			28,282
Total Liabilities and Shareholders’ Equity	$	387,883		$	374,155

See notes to consolidated financial statements 10

FIRST COMMUNITY FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

	Years Ended December, 31,
	2011		2010
	(In Thousands, Except per Share Data)
INTEREST INCOME
Loans, including fees	$	14,740	$	14,370
Securities:
Taxable		2,237		2,481
Tax exempt		1,383		1,289
Other		31		41
Total Interest Income		18,391		18,181
INTEREST EXPENSE
Deposits		4,982		5,828
Short-term borrowings		39		52
Long-term debt		793		949
Total Interest Expense		5,814		6,829
Net Interest Income		12,577		11,352
PROVISION FOR LOAN LOSSES		982		336
Net Interest Income after Provision for Loan Losses		11,595		11,016
OTHER INCOME
Service charges on deposits		776		755
Fiduciary activities		525		474
Earnings on investment in life insurance		341		240
ATM and debit card fees		641		638
Investment securities gains from sales		12		182
Realized gains on sales of assets		6		67
Other		762		403
Total Other Income		3,063		2,759
OTHER EXPENSES
Employee compensation and benefits		4,998		4,634
Net occupancy and equipment		1,097		1,126
Professional fees		504		392
Director and advisory boards compensation		353		362
ATM expenses		298		364
Supplies and postage		326		324
FDIC/OCC expense		352		546
Pennsylvania bank shares tax		307		288
Other operating		1,182		1,000
Total Other Expenses		9,417		9,036
Income before Income Taxes		5,241		4,739
PROVISION FOR INCOME TAXES		1,095		1,053
Net Income	$	4,146	$	3,686
BASIC EARNINGS PER SHARE	$	2.95	$	2.63
DIVIDENDS PER SHARE	$	0.750	$	0.675

See notes to consolidated financial statements 11

FIRST COMMUNITY FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

	Common Stock		Capital In Excess of Par Value		Retained Earnings			Treasury Stock			Accumulated Other Comprehensive Income			Total
			(In Thousands, Except per Share Data)
Balance—January 1, 2010	$	7,022	$	350	$	16,820		$	(110	)	$	1,276		$	25,358
Comprehensive income:
Net income						3,686									3,686
Change in net unrealized gains on securities available for sale, net of deferred income taxes												104			104
Total comprehensive income															3,790
Issuance of stock in connection with dividend reinvestment plan 3,065 shares		15		65											80
Cash dividends, $0.675 per share						(946	)								(946	)
Balance, December 31, 2010	$	7,037	$	415	$	19,560		$	(110	)	$	1,380		$	28,282
Comprehensive income:
Net income						4,146									4,146
Change in net unrealized gains on securities available for sale, net of deferred income taxes												(64	)		(64	)
Total comprehensive income															4,082
Issuance of stock in connection with dividend reinvestment plan 4,109 shares		21		107											128
Cash dividends, $0.75 per share						(1,054	)								(1,054	)
Balance, December 31, 2011	$	7,058	$	522	$	22,652		$	(110	)	$	1,316		$	31,438

See notes to consolidated financial statements 12

FIRST COMMUNITY FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Years Ended December 31,
	2011			2010
	(In Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	4,146		$	3,686
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation of premises and equipment		432			479
Amortization of intangible assets		14			17
Net amortization (accretion) of investment securities		174			335
Earnings on investment in life insurance		(341	)		(240	)
Realized gains on securities		(12	)		(182	)
Realized gains on sales of assets		(6	)		(67	)
Provision for loan losses		982			336
Deferred income taxes		(222	)		237
Decrease in accrued interest receivable and other assets		478			146
Increase in accrued interest payable and other liabilities		217			487
Net Cash Provided by Operating Activities		5,862			5,234
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available for sale:
Proceeds from maturities, calls and principal repayments		19,234			31,619
Proceeds from sales		213			3,614
Purchases		(18,300	)		(29,872	)
Securities held to maturity:
Proceeds from maturities, calls and principal repayments		1,960			3,716
Purchases		(4,640	)		(4,924	)
Net increase in loans		(12,703	)		(19,991	)
Decrease in time certificates of deposit		—			198
Purchases of premises and equipment		(2,091	)		(106	)
Proceeds from sale of foreclosed real estate		—			80
Purchase of life insurance		—			(1,809	)
Net (purchases) dispositions of restricted investment in bank stocks		420			120
Net Cash Used in Investing Activities		(15,907	)		(17,355	)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits		12,700			21,390
Net decrease in short-term borrowings		(1,345	)		(482	)
Proceeds from long-term debt		—			—
Repayment of long-term debt		(1,000	)		(6,000	)
Proceeds from issuance of common stock		128			80
Acquisition of treasury stock		—			—
Cash dividends paid		(1,054	)		(946	)
Net Cash Provided by Financing Activities		9,429			14,042
Net Increase (decrease) in Cash and Cash Equivalents		(616	)		1,921
CASH AND CASH EQUIVALENTS—BEGINNING		10,554			8,633
CASH AND CASH EQUIVALENTS—ENDING	$	9,938		$	10,554
SUPPLEMENTARY CASH FLOWS INFORMATION
Interest paid	$	5,845		$	6,943
Income taxes paid	$	1,389		$	809
Non-cash investing activities Transfers from loans to foreclosed real estate	$	249		$	24

13

See notes to consolidated financial statements

FIRST COMMUNITY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1—SIGNIFICANT ACCOUNTING POLICIES

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

Principles of Consolidation

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

Subsequent Events

The Corporation has evaluated events and transactions occurring subsequent to the balance sheet date of December 31, 2011, for items that should potentially be recognized or disclosed in these financial statements. The evaluation was conducted through the date these financial statements were issued.

Basis of Accounting

The Corporation uses the accrual basis of accounting.

Estimates

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

Trust Assets

Assets held by the Trust Department in an agency or fiduciary capacity for its customers are excluded from the consolidated financial statements since they do not constitute assets of the Corporation. The market value of assets held by the Trust Department amounted to $101,875,000 and $108,223,000 at December 31, 2011 and 2010, respectively. Income from fiduciary activities is recognized on the accrual method.

Significant Group Concentrations of Credit Risk

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

14

FIRST COMMUNITY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1—SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Cash and Cash Equivalents

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

Securities

Management determines the appropriate classification of debt securities at the time of purchase and re-evaluates such designation as of each balance sheet date. Securities available for sale are those securities that the Corporation intends to hold for an indefinite period of time, but not necessarily to maturity. Any decision to sell an available for sale security would be based on various factors. These securities are stated at fair value. Unrealized gains (losses) are reported as changes in other comprehensive income, a component of shareholders’ equity, net of the related deferred tax effect. Premiums and discounts are recognized as interest income over the estimated lives of the securities, using the interest method. Securities held to maturity are those securities that the Corporation has the intent and ability to hold to maturity. These securities are stated at cost adjusted for amortization of premiums and accretion of discounts, which is recognized as interest income over their estimated lives, using the interest method. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method.

Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) for equity securities, the intent and ability of the Corporation to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.

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

Time Certificates of Deposit

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

Loans

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

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

15

FIRST COMMUNITY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1—SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Loans (Continued)

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

Allowance for Loan Losses

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

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

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

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

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

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

16

FIRST COMMUNITY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1—SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Allowance for Loan Losses (Continued)

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

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

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

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

Restricted Investment in Bank Stocks

Restricted investment in bank stocks represents required investments in the common stock of correspondent banks, consisting of the Federal Reserve Bank of Philadelphia in the amount of $258,500, Atlantic Central Bankers Bank in the amount of $20,000, and the Federal Home Loan Bank (FHLB) of Pittsburgh in the amount of $1,843,000. No readily available market exists for these stocks. These restricted investments are carried at cost. In December 2008, the FHLB of Pittsburgh notified member banks that it was suspending dividend payments and the repurchase of capital stock. In 2010, the FHLB of Pittsburgh began repurchasing excess stock held at member institutions.

17

FIRST COMMUNITY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1—SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Restricted Investment in Bank Stocks (Continued)

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

Management believes no impairment charge is necessary related to its restricted stock as of December 31, 2011.

Premises and Equipment

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

Foreclosed Real Estate

Foreclosed real estate includes assets acquired through foreclosure and loans identified as in-substance foreclosures. A loan is classified as in-substance foreclosure when the Corporation has taken possession of the collateral regardless of whether formal foreclosure proceedings have taken place. Foreclosed real estate is initially valued at its estimated fair market value, net of selling costs, at the time of foreclosure, establishing the property’s new basis. Subsequent to foreclosure, valuations are periodically performed by management and the foreclosed assets are carried at the lower of carrying amount or fair value less cost to sell. Gains on the sale of foreclosed real estate are included in other income, while losses and writedowns resulting from periodic revaluations are included in other expenses. Foreclosed real estate, which is included in other assets, amounted to $358,000 at December 31, 2011 and $133,000 in 2010.

Transfers of Financial Assets

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

Advertising Costs

The Corporation charges the costs of advertising to expense as incurred. Advertising expense was $115,000 and $107,000 for the years ended December 31, 2011 and 2010, respectively.

18

FIRST COMMUNITY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1—SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Income Taxes

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

Earnings per Share

The Corporation has a simple capital structure. Basic earnings per share represents net income divided by the weighted average number of common shares outstanding during the period. The weighted average number of common shares outstanding was 1,405,302 and 1,401,885 for the years ended 2011 and 2010.

Segment Reporting

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

Comprehensive Income

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

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

	Years Ended December 31,
	2011			2010
	(In Thousands)
Unrealized holding gains (losses) on available for sale securities	$	(82	)	$	346
Reclassification adjustment for gains realized in net income		(12	)		(182	)
Net Unrealized Gains (Losses)		(94	)		164
Tax effect		30			(60	)
Net of Tax Amount	$	(64	)	$	104

Loans Serviced

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

19

FIRST COMMUNITY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1—SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Loans Serviced (Continued)

and retains the servicing of those loans. At December 31, 2011 and 2010, the balance of loans serviced for others was $30,687,000 and $22,353,000 respectively. The estimated fair value of mortgage servicing rights (MSRs) related to loans sold and serviced by the Corporation is recorded as an asset upon sale of such loans. MSRs are amortized as a reduction to servicing income over the estimated lives of the underlying loans. MSRs are evaluated periodically for impairment, by comparing the carrying amount to the estimated fair value.

Off Balance Sheet Financial Instruments

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

Fair Value Measurements

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

Reclassifications

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

New and Recently Adopted Accounting Pronouncements

In January 2010, the FASB issued ASU 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements. ASU 2010-06 amends Subtopic 820-10 to clarify existing disclosures, require new disclosures, and includes conforming amendments to guidance on employers’ disclosures about postretirement benefit plan assets. ASU 2010-06 was effective for interim and annual periods beginning after December 15, 2009, except for disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures were effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years. The adoption of the new guidance did not have a material impact on the Company’s consolidated financial statements.

In July 2010, the FASB issued ASU 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. The new disclosure guidance significantly expanded the existing requirements leading to greater transparency into the company’s exposure to credit losses from lending arrangements. The extensive new disclosures of information as of the end of a reporting period was effective for annual reporting periods ending on or after December 15, 2010 and has been presented in Note 4 to the Consolidated Financial Statements. Specific disclosures regarding activity that occurred before the issuance of the ASU, such as the allowance roll forward and modification disclosures was required to be adopted for periods beginning on or after December 15, 2010, and has also incorporated in Note 4.

20

FIRST COMMUNITY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1—SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

New and Recently Adopted Accounting Policies (Continued)

In December 2010, the FASB issued ASU 2010-28, Intangibles—Goodwill and Other (Topic 350), When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts. ASU 2010-28 affects all entities that have recognized goodwill and have one or more reporting units whose carrying amount for purposes of performing Step 1 of the goodwill impairment test is zero or negative. ASU 2010-28 modifies Step 1 so that for those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that impairment may exist. The qualitative factors are consistent with existing guidance, which requires that goodwill of a reporting unit be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. This guidance was effective for the Company for fiscal years, and interim periods within those years, beginning after December 15, 2010. Adoption of ASU 2010-28 did not have a material impact on the Company’s consolidated financial statements.

In April 2011, the FASB issued ASU 2011-2, A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring. This guidance clarifies which loan modifications constitute troubled debt restructurings and is intended to assist creditors in determining whether a modification of the terms of a receivable meets the criteria to be considered a troubled debt restructuring, both for the purpose of recording an impairment charge and for disclosure of troubled debt restructurings. In evaluating whether a restructuring constitutes a troubled debt restructuring, a creditor must separately conclude, under the guidance clarified by ASU 2011-2, that both of the following exist: (a) the restructuring constitutes a concession; and (b) the debtor is experiencing financial difficulties. As allowed by the guidance, the Company adopted the provisions of ASU 2011-2 in the year ending December 31, 2011. See presentation of the disclosure in Note 4 to the Consolidated Financial Statements.

In April 2011, the FASB issued ASU 2011-03, Transfers and Servicing (Topic 860) – Reconsideration of Effective Control for Repurchase Agreements. The amendments in this ASU remove from the assessment of effective control (1) the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee and (2) the collateral maintenance implementation guidance related to that criterion. The amendments in this ASU are effective for the first interim or annual period beginning on or after December 15, 2011. The guidance should be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date. Early adoption is not permitted. The Company is currently assessing the impact that ASU 2011-03 will have on its consolidated financial statements.

In May 2011, the FASB issued ASU 2011-04, Fair Value Measurement (Topic 820) – Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. This ASU is the result of joint efforts by the FASB and IASB to develop a single, converged fair value framework on how (not when) to measure fair value and what disclosures to provide about fair value measurements. The ASU is largely consistent with existing fair value measurement principles in U.S. GAAP (Topic 820), with many of the amendments made to eliminate unnecessary wording differences between U.S. GAAP and IFRSs. The amendments are effective for public companies during the interim and annual periods beginning after December 15, 2011 with prospective application. For nonpublic entities, the amendments are effective for annual periods

21

FIRST COMMUNITY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1—SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

New and Recently Adopted Accounting Policies (Continued)

beginning after December 15, 2011. Early application is not permitted. The Company is currently assessing the impact that ASU 2011-04 will have on its consolidated financial statements.

In June 2011, the FASB issued ASU 2011-05, Comprehensive Income (Topic 220) – Presentation of Comprehensive Income. The objective of this ASU is to improve the comparability, consistency and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income by eliminating the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity. The amendments require that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The single statement of comprehensive income should include the components of net income, a total for net income, the components of other comprehensive income, a total for other comprehensive income, and a total for comprehensive income. In the two-statement approach, the first statement should present total net income and its components followed consecutively by a second statement that should present all the components of other comprehensive income, a total for other comprehensive income, and a total for comprehensive income. The amendments do not change the items that must be reported in other comprehensive income, the option for an entity to present components of other comprehensive income either net of related tax effects or before related tax effects, or the calculation or reporting of earnings per share. The amendments in this ASU should be applied retrospectively. For public companies, the amendments are effective for fiscal years and interim periods within those years beginning after December 15, 2011. For non-public companies, the amendments are effective for fiscal years and interim periods within those years ending after December 15, 2012. Early adoption is permitted because compliance with the amendments is already permitted. The amendments do not require transition disclosures. The Company is currently assessing the impact that ASU 2011-05 will have on its consolidated financial statements.

In December 2011, the FASB issued ASU 2011-12, Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05, which defers certain provisions of ASU 2011-05, Presentation of Comprehensive Income. One of ASU 2011-05’s provisions requires entities to present reclassification adjustments out of accumulated other comprehensive income by component in both the statement in which net income is presented and the statement in which other comprehensive income is presented (for both interim and annual financial statements). Accordingly, this requirement is indefinitely deferred by ASU 2011-12 and will be further deliberated by the FASB at a future date. ASUs 2011-05 and 2011-12 are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, and should be applied retrospectively for all periods presented in the financial statements. The Company has not yet decided which statement format it will adopt.

In September 2011, the FASB issued ASU 2011-08, Intangibles – Goodwill and Other (Topic 350) – Testing Goodwill for Impairment. ASU 2011-08 allows companies to assess qualitative factors to determine if it is more-likely-than-not that goodwill might be impaired whether it is necessary to perform the two-step goodwill impairment test required under current accounting standards. This guidance is effective for fiscal years beginning after December 15, 2011, and early adoption is permitted. The Company is currently evaluating this guidance, but does not expect the adoption will have a material effect on its consolidated financial statements.

22

FIRST COMMUNITY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1—SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

New and Recently Adopted Accounting Policies (Continued)

In December 2011, the FASB issued ASU 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities. The ASU requires new disclosures regarding the nature of an entity’s rights of setoff and related arrangements associated with its financial instruments and derivative instruments. The new disclosures are designed to make GAAP financial statements more comparable to those prepared under International Financial Reporting Standards. The new disclosures entail presenting information about both gross and net exposures. The new disclosure requirements are effective for annual reporting periods beginning on or after January 1, 2013, and interim periods therein; retrospective application is required. The Company has not yet completed its evaluation of this ASU; however, since the provisions of ASU 2011-11 are disclosure-related, the Company’s adoption of this ASU is not expected to have an impact to its financial condition or results of operations.

NOTE 2—RESTRICTIONS ON CASH AND DUE FROM BANKS

In return for services obtained through correspondent banks, the Corporation is required to maintain non-interest bearing cash balances in those correspondent banks. At December 31, 2011 and 2010, compensating balances approximated $1,866,000 and $1,607,000, respectively. During 2011 average required balances totaled $1,758,000 and during 2010 totaled $1,605,000.

NOTE 3—SECURITIES

Amortized cost and fair value at December 31, 2011 and December 31, 2010 were as follows:

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(In Thousands)
SECURITIES AVAILABLE FOR SALE:
December 31, 2011:
U.S. agency securities	$	5,496	$	169	$	—		$	5,665
Mortgage-backed securities		63,647		1,680		(15	)		65,312
Corporate securities		1,989		—		(217	)		1,772
Equity securities		640		415		—			1,055
	$	71,772	$	2,264	$	(232	)	$	73,804
December 31, 2010:
U.S. agency securities	$	9,738	$	180	$	—		$	9,918
Mortgage-backed securities		63,102		1,599		(41	)		64,660
Equity securities		661		388		—			1,049
	$	73,501	$	2,167	$	(41	)	$	75,627

23

FIRST COMMUNITY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3—SECURITIES (CONTINUED)

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(In Thousands)
SECURITIES HELD TO MATURITY:
December 31, 2011:
State and municipal securities	$	34,972	$	2,082	$	(415	)	$	36,639
	$	34,972	$	2,082	$	(415	)	$	36,639
December 31, 2010:
State and municipal securities	$	31,872	$	363	$	(1,259	)	$	30,976
	$	31,872	$	363	$	(1,259	)	$	30,976

The following table shows the Corporation’s investments’ gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at December 31, 2011 and December 31, 2010:

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

24

FIRST COMMUNITY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3—SECURITIES (CONTINUED)

	Less than 12 Months				12 Months or More				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
December 31, 2010	(In Thousands)
SECURITIES AVAILABLE FOR SALE:
Mortgage-backed securities	$	8,744	$	41	$	—	$	—	$	8,744	$	41
		8,744		41		—		—		8,744		41
SECURITIES HELD TO MATURITY:
State and municipal securities		15,135		530		2,280		729		17,415		1,259
Total	$	23,879	$	571	$	2,280	$	729	$	26,159	$	1,300

At December 31, 2011, eight mortgage-backed securities have unrealized losses. The aggregate depreciation from the Corporation’s amortized cost basis on these securities is 0.2%. In management’s opinion, these unrealized losses relate to changes in interest rates. The Corporation’s mortgage backed security portfolio consists of only government sponsored agencies, and contains no private label securities.

At December 31, 2011, nineteen state and municipal securities have unrealized losses with aggregate depreciation of 8.9% from the Corporation’s amortized cost basis. In management’s opinion, these unrealized losses relate primarily to changes in interest rates. In analyzing the issuer’s financial condition, management considers the issuer’s bond rating as well as the financial performance of the respective municipality.

At December 31, 2011, four corporate securities have unrealized losses with aggregate depreciation of 10.9% from the Corporation’s amortized cost basis. In management’s opinion, these unrealized losses relate primarily to changes in interest rates. In analyzing the issuer’s financial condition, management considers the issuer’s bond rating as well as the financial performance of the respective company.

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

25

FIRST COMMUNITY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3—SECURITIES (CONTINUED)

Gross realized gains and losses for the years ending December 31, 2011 and December 31, 2010 were as follows (in thousands):

	Gross Realized Gains		Gross Realized Losses		Net Gains (Losses)
December 31, 2011:
Equity securities	$	8	$	—	$	8
Mortgage-backed securities		4		—		4
	$	12	$	—	$	12
December 31, 2010:
Mortgage-backed securities	$	182	$	—	$	182
	$	182	$	—	$	182

Amortized cost and fair value at December 31, 2011 by contractual maturity are shown below. Municipal securities with prerefunded issues are included in the category in which payment is expected to occur. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay with or without penalties.

	Available for Sale				Held to Maturity
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(In Thousands)
1 year or less	$	1,000	$	1,002	$	—	$	—
Over 1 year through 5 years		5,483		5,587		10,473		10,811
Over 5 years through 10 years		1,002		848		14,165		15,280
Over 10 years		—		—		10,334		10,548
Mortgage-backed securities		63,647		65,312		—		—
Equity securities		640		1,055		—		—
	$	71,772	$	73,804	$	34,972	$	36,639

At December 31, 2011 and 2010, securities with a carrying value of $36,653,000 and $46,840,000, respectively, were pledged as collateral as required by law on public deposits and for other purposes.

26

FIRST COMMUNITY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 4—LOANS

Allowance for loan losses at December 31, 2011 and December 31, 2010 and loans receivable at December 31, 2011 and December 31, 2010 are as follows:

Allowance for Loan Losses:

	Commercial			Commercial Real Estate		Agricultural			Consumer			Residential Real Estate			Total
	(in Thousands)
December 31, 2010 Total Allowance for loan losses	$	730		$	630	$	—		$	92		$	702		$	2,154
Provision		96			452		398			(5	)		41			982
Charge-offs		(18	)		—		(27	)		(4	)		(24	)		(73	)
Recoveries		—			—		11			3			8			22
December 31, 2011 Total Allowance for loan losses	$	808		$	1,082	$	382		$	86		$	727		$	3,085
Ending balance for loans individually evaluated for impairment	$	296		$	670	$	—		$	—		$	—		$	966
Ending balance for loans collectively evaluated for impairment	$	512		$	412	$	382		$	86		$	727		$	2,119

Changes in the allowance for loan losses during 2010 were as follows:

	2010
Balance, beginning	$	2,830
Provision charged to operations		336
Recoveries on charged off loans		24
Loans charged off		(1,036	)
Balance, ending	$	2,154

27

FIRST COMMUNITY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 4—LOANS (CONTINUED)

Loans Receivable:

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

		$000,00		$000,00		$000,00		$000,00		$000,00		$000,00
December 31, 2010			Commercial
	Commercial		Real Estate		Agricultural		Consumer		Residential		Total
	(in Thousands)
Individually evaluated for impairment	$	111	$	186	$	—	$	—	$	—	$	297
Collectively evaluated for impairment		74,166		43,680	$	—		6,655		113,798		238,299
Total loans	$	74,277	$	43,866	$	—	$	6,655	$	113,798	$	238,596

Analysis of credit quality indicators is as follows:

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

28

FIRST COMMUNITY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 4—LOANS (CONTINUED)

December 31, 2010	Commercial		Commercial Real Estate		Consumer		Residential		Total
	(in Thousands)
Pass	$	71,419	$	40,292	$	6,644	$	113,139	$	231,494
Special Mention		2,104		1,169		—		—		3,273
Substandard		754		2,405		11		659		3,829
Doubtful		—		—		—		—		—
Loss		—		—		—		—		—
Total loans	$	74,277	$	43,866	$	6,655	$	113,798	$	238,596

The following is a summary of impaired loans:

December 31, 2011	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
	(In Thousands)
With no specific allowance needed
Commercial	$	—	$	—	$	—	$	—	$	—
Commercial real estate		—		—		—		—		—
Agricultural		469		469		—		472		31
With an allowance recorded
Commercial		296		296		296		267		11
Commercial real estate		4,477		4,477		670		4,492		212
Total
Commercial		296		296		296		267		11
Commercial real estate		4,477		4,477		670		4,492		212
Agricultural		469		469		—		472		31
Total	$	5,242	$	5,242	$	966	$	5,231	$	254

29

FIRST COMMUNITY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 4—LOANS (CONTINUED)

December 31, 2010	Recorded		Unpaid Principal		Related		Average Recorded		Interest Income
	Investment		Balance		Allowance		Investment		Recognized
	(In Thousands)
With no specific allowance needed
Commercial	$	93	$	93	$	—	$	109	$	8
Commercial real estate		105		105		—		110		6
With an allowance recorded
Commercial		18		18		11		19		1
Commercial real estate		81		81		4		81		6
Total
Commercial		111		111		11		128		9
Commercial real estate		186		186		4		191		12
Total	$	297	$	297	$	15	$	319	$	21

Age analysis of past-due loans is as follows:

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

30

FIRST COMMUNITY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 4—LOANS (CONTINUED)

	30 – 59 Days Past Due		60 - 89 Days Past Due		> 90 Days Past Due		Total Past Due		Current		Total Loans		Allowance For Collectively Impaired Loans		>90 Days And Still Accruing		Nonaccruals
December 31, 2010
	(In Thousands)
Commercial	$	136	$	—	$	—	$	136	$	74,141	$	74,277	$	—	$	—	$	111
Commercial Real Estate		—		—		—		—		43,866		43,866		—		—		239
Residential		539		109		208		856		112,942		113,798		—		—		649
Consumer		99		29		17		145		6,510		6,655		—		—		17
Total	$	774	$	138	$	225	$	1,137	$	237,459	$	238,596	$	—	$	—	$	1,016

The following is a summary of Troubled Debt Restructurings:

	Twelve Months Ended December 31, 2011
	Number of contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Troubled Debt Restructurings Commercial—Mortgage		2		4,484		4,484
Troubled Debt Restructurings that Subsequently Defaulted		—		—		—

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

The Corporation, in the ordinary course of business, has loan, deposit and other routine transactions with its officers, directors and principal shareholders and entities in which they have principal ownership. Loans are made to such customers at the same credit terms as other borrowers and do not represent more than the usual risk of collection. Changes during 2011 and 2010 in these related party loans were as follows (in thousands):

	2011			2010
	(In Thousands)
Balance, beginning	$	788		$	828
Advances		468			1,027
Repayments		(586	)		(1,067	)
Balance, ending	$	670		$	788

31

FIRST COMMUNITY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5—PREMISES AND EQUIPMENT

Premises and equipment at December 31 were as follows:

Range of
Useful Lives	2011			2010
(in years)	(In Thousands)
Land	$	1,250		$	741
Buildings and improvements 7—39		8,992			7,631
Furniture, equipment and software 3—20		4,957			4,736
		15,199			13,108
Accumulated depreciation		(7,738	)		(7,306	)
Premises and equipment, net	$	7,461		$	5,802

NOTE 6—DEPOSITS

Deposits were comprised of the following as of December 31:

	2011		2010
	(In Thousands)
Non-interest bearing demand	$	35,994	$	31,910
Interest bearing demand		27,620		27,205
Savings		111,515		98,018
Time deposits less than $100,000		99,011		107,172
Time deposits greater than $100,000		56,409		53,544
Total	$	330,549	$	317,849

Scheduled maturities of time deposits at December 31, 2011 were as follows (in thousands):

2012	$	41,003
2013		37,097
2014		17,461
2015		34,387
2016		25,472
Total	$	155,420

The following table sets forth maturity information on time deposits of $100,000 or more as of December 31, 2011 (in thousands):

Three months or less	$	3,051
Over three and through six months		2,840
Over six and through twelve months		5,435
Over twelve months		45,083
Total	$	56,409

32

FIRST COMMUNITY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6—DEPOSITS (CONTINUED)

Total aggregate deposits of employees, officers, directors and related interests on December 31, 2011 was $7,825,000.

NOTE 7—BORROWINGS

Short-term borrowings at December 31 were as follows:

		00000000			00000000
	2011			2010
	(In Thousands)
Amount outstanding at end of year:
Securities sold under agreements to repurchase	$	2,685		$	3,930
Federal funds purchased		—			—
Federal Home Loan Bank		—			—
Treasury tax and loan note		—			100
Total	$	2,685		$	4,030
Weighted average interest rate at end of year		1.33	%		1.17	%
Maximum amount outstanding at any end of month	$	5,194		$	4,455
Daily average amount outstanding		3,215			4,521
Approximate weighted average interest rate for the year		1.21	%		1.15	%

Securities sold under agreements to repurchase generally mature within one day from the transaction date. At December 31, 2011, securities with a carrying amount of $3,951,000 and a fair value of $3,965,000 were pledged as collateral for these agreements. At December 31, 2010, securities with a carrying amount of $5,180,000 and a fair value of $5,198,000 were pledged as collateral for these agreements. As of December 31, 2011, the interest rate on securities sold under agreements to repurchase was 1.33%. The securities underlying the agreements were under the Corporation’s control.

Long-term borrowings at December 31 were as follows:

	2011		2010
	(In Thousands)
Convertible advances:
Maturing in 2011 with an initial fixed rate of 4.98%	$	—	$	1,000
Maturing in 2013 with an initial fixed rate of 3.11%		5,000		5,000
Maturing in 2017 with initial fixed rates ranging from 4.30% to 4.60%, with a weighted average rate of 4.45% at December 31, 2011 and 2010.		10,000		10,000
Total	$	15,000	$	16,000

Convertible advances allow the FHLB the periodic option to convert to a LIBOR adjustable-rate advance after the specified fixed rate period has elapsed. At December 31, 2011, the FHLB has the option to convert advances to rates that range from three month LIBOR plus 0.07% to 0.13%, of which $15 million is eligible for the conversion option, but not exercised by the FHLB, at December 31, 2011. Upon the

33

FIRST COMMUNITY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 7—BORROWINGS (CONTINUED)

FHLB’s conversion option being exercised, the Bank has the option to repay the respective advance in full, without penalty.

The Corporation has a maximum borrowing capacity through the Federal Home Loan Bank of approximately $126,532,000, of which $111,532,000 was available at December 31, 2011. The borrowing capacity is collateralized by security agreements in certain residential real estate backed assets of the Corporation, including loans and investments.

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

The Trust issued $5,000,000 of mandatorily redeemable preferred securities to third-party investors. The Corporation’s obligations under the debentures and related documents, taken together, constitute a full and unconditional guarantee by the Corporation of the Trust’s obligations under the preferred securities. The junior subordinated debt securities pay interest quarterly at 3-month LIBOR plus 3.00% (3.40% at December 31, 2011). Pursuant to the debenture agreement, the Corporation can elect to defer payments of interest for up to 20 consecutive quarterly periods, provided there is no event of default as defined in the indenture. The Corporation has not deferred any quarterly interest payments through December 31, 2011. The preferred securities are redeemable quarterly by the Corporation at 100% of principal plus accrued interest on or after January 7, 2009. The preferred securities must be redeemed upon maturity of the debentures on January 7, 2034. The terms of the junior subordinated deferrable interest debentures match those of the preferred securities.

NOTE 8—OPERATING LEASES

The Corporation leases its Delaware office (Juniata County), Shermans Dale office, the loan production office in Lewistown and the land on which its East Waterford office was constructed. The Corporation has an option through 2014 to purchase the land, for a predetermined price of $125,000. The Corporation also receives rental income for leasing of available space at its West Perry and Loysville offices. Net lease expense was $12,000 in 2011 and $6,000 in 2010 after deducting rental expense of $64,000 and $64,000 respectively.

The following table represents the Corporation’s contractual lease obligations to make future payments as of December 31, 2011 (in thousands):

		00000		00000		00000		00000		00000
	Less than 1 Year		1 - 3 Years		4 - 5 Years		Over 5 Years		Total
Total Operating Leases	$	60	$	49	$	—	$	—	$	109

34

FIRST COMMUNITY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 9—INCOME TAXES

The components of income tax expense for the years ended December 31, 2011 and 2010 are as follows:

	2011			2010
	(In Thousands)
Federal:
Current	$	1,317		$	816
Deferred		(222	)		237
Total	$	1,095		$	1,053

Reconciliations of the statutory federal income tax at a rate of 34% to the income tax expense reported in the consolidated statements of income for the years ended December 31, 2011 and 2010 are as follows:

	Percentage of Income before Income Taxes
	2011			2010
Federal income tax at statutory rate		34.0	%		34.0	%
Tax-exempt income		(11.6	)		(10.6	)
Earnings on investment in life insurance		(1.5	)		(1.2	)
Total		20.9	%		22.2	%

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

	2011			2010
	(In Thousands)
Deferred tax assets:
Allowance for loan losses	$	1,023		$	694
Nonaccrual loans interest		4			5
Intangible assets		5			7
Retirement liabilities		576			537
State net operating loss carryforward		212			195
Gross deferred tax asset		1,820			1,438
Valuation allowance		(212	)		(195	)
		1,608			1,243
Deferred tax liabilities:
Accumulated depreciation		280			253
Available for sale securities		716			746
Other		131			15
		1,127			1,014
Net Deferred Tax Assets	$	481		$	229

35

FIRST COMMUNITY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 9 – INCOME TAXES (CONTINUED)

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

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

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

As of December 31, 2011, the Corporation has State net operating loss carryforwards of $2,117,000 that expire through the year 2031. Management does not believe that these net operating loss carryforwards will be utilized prior to their expiration, as they were incurred by the holding company with little revenue opportunities to offset the losses, and as such, a valuation allowance has been provided for them.

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

The Corporation recognizes interest and penalties on income taxes as a component of income tax expense. Tax years subject to examination by tax authorities are the years ended December 31, 2010, 2009 and 2008.

NOTE 10—RETIREMENT PLANS

The Corporation maintains a 401(k) plan for the benefit of eligible employees. Employer contributions include matching a portion of employee contributions and a discretionary contribution determined by the Corporation. Corporation contributions to the Plan were $187,000 and $172,000 for 2011 and 2010.

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:

36

FIRST COMMUNITY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 10 – RETIREMENT PLANS (CONTINUED)

		00000		00000
	2011		2010
	(In Thousands)
Employee compensation	$	80	$	62
Director compensation		76		74

The balance accrued for these plans included in other liabilities as of December 31, 2011 and 2010 totaled $1,694,000 and $1,578,000.

To fund the benefits under these plans, the Corporation is the owner of single premium life insurance policies on participants in the non-qualified retirement plans. At December 31, 2011 and 2010, the cash value of these policies was $7,399,000 and $7,109,000.

NOTE 11—REGULATORY MATTERS AND SHAREHOLDERS’ EQUITY

The Corporation and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet the minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Corporation’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Corporation and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Corporation and the Bank to maintain minimum amounts and ratios (set forth below) of Tier 1 capital to average assets and of Tier 1 and total capital (as defined in the regulations) to risk weighted assets. Management believes, as of December 31, 2011, that the Corporation and the Bank meet all capital adequacy requirements to which they are subject.

As of December 31, 2011, the most recent notification from the regulators categorized the Bank as “well capitalized” under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the Bank’s category.

37

FIRST COMMUNITY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 11 – REGULATORY MATTERS AND SHAREHOLDERS’ EQUITY (CONTINUED)

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

	Actual					For Capital Adequacy Purposes					To be Well Capitalized under Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
	(Dollars in Thousands)
CORPORATION:
As of December 31, 2011:
Tier 1 leverage ratio (to average assets)	$	35,086		9.1	%	$	³15,349	³	4.0	%		N/A		N/A
Tier 1 risk-based capital ratio (to risk-weighted assets)		35,086		16.8		³	8,332	³	4.0			N/A		N/A
Total risk-based capital ratio (to risk-weighted assets)		37,884		18.2		³	16,663	³	8.0			N/A		N/A
As of December 31, 2010:
Tier 1 leverage ratio (to average assets)	$	31,888		8.6	%	$	³14,852	³	4.0	%		N/A		N/A
Tier 1 risk-based capital ratio (to risk-weighted assets)		31,888		15.9		³	8,028	³	4.0			N/A		N/A
Total risk-based capital ratio (to risk-weighted assets)		34,321		17.1		³	16,056	³	8.0			N/A		N/A
BANK:
As of December 31, 2011:
Tier 1 leverage ratio (to average assets)	$	34,329		9.0	%	$	³15,325	³	4.0	%	$	³19,157	³	5.0	%
Tier 1 risk-based capital ratio (to risk-weighted assets)		34,329		16.5		³	8,304	³	4.0		³	12,455	³	6.0
Total risk-based capital ratio (to risk-weighted assets)		36,932		17.8		³	16,607	³	8.0		³	20,759	³	10.0
As of December 31, 2010:
Tier 1 leverage ratio (to average assets)	$	31,104		8.4	%	$	³14,823	³	4.0	%	$	³18,529	³	5.0	%
Tier 1 risk-based capital ratio (to risk-weighted assets)		31,104		15.6		³	7,998	³	4.0		³	11,997	³	6.0
Total risk-based capital ratio (to risk-weighted assets)		33,362		16.7		³	15,997	³	8.0		³	19,996	³	10.0

Certain restrictions exist regarding the ability of the Bank to transfer funds to the Corporation in the form of cash dividends, loans or advances. Regulatory approval is required if the total of all dividends declared by a national bank in any calendar year exceeds net profits (as defined) for that year combined with the retained net profits for the two preceding calendar years. At December 31, 2011, approximately $7,532,000 of undistributed earnings of the Bank, included in consolidated shareholders’ equity, was available for distribution to the Corporation as dividends without prior regulatory approval.

In 2008 the Corporation implemented a dividend reinvestment and stock purchase plan. Holders of common stock may participate in the plan in which reinvested dividends and voluntary cash payments may be invested in additional common shares. The Corporation reserved 100,000 shares to be issued under this plan, of which 11,522 common shares have been issued pursuant to this plan.

On January 8, 2008, the Board of Directors of the Corporation authorized a stock repurchase program pursuant to which the Corporation is authorized to purchase up to 7.1% of its outstanding shares or

38

FIRST COMMUNITY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 11—REGULATORY MATTERS AND SHAREHOLDERS’ EQUITY (CONTINUED)

100,000 shares. Share repurchases will be made from time to time and may be effected through open market purchases, block trades, or in privately negotiated transactions. As of December 31, 2011, the Corporation has purchased 3,656 shares under this repurchase program.

NOTE 12—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. Management believes that the proceeds obtained through a liquidation of such collateral would be sufficient to cover the maximum potential amount of future payments required under the corresponding guarantees. The current amount of the liability as of December 31, 2011 and 2010 for guarantees under standby letters of credit issued is not material.

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

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

	2011		2010
	(In Thousands)
Commitments to extend credit	$	33,309	$	30,645
Standby letters of credit	$	110	$	175

39

FIRST COMMUNITY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 13—FAIR VALUE OF FINANCIAL INSTRUMENTS

Management uses its best judgment in estimating the fair value of the Corporation’s consolidated financial instruments; however, there are inherent weaknesses in any estimation technique. Therefore, for substantially all financial instruments, the fair value estimates herein are not necessarily indicative of the amounts the Bank could have realized in a sales transaction on the dates indicated. The estimated fair value amounts have been measured as of their respective period-ends and have not been re-evaluated or updated for purposes of these financial statements subsequent to those respective dates. As such, the estimated fair values of these financial instruments subsequent to the respective reporting dates may be different than the amounts reported at each period-end.

ASC Topic 820, Fair Value Measurements and Disclosure, which defines fair value, establishes a framework for measuring fair value under GAAP, expands disclosures about fair value measurements, and applies to other accounting pronouncements that require or permit fair value measurements. The Bank adopted Fair Value Measurements effective for its fiscal year beginning January 1, 2008.

Fair value measurement and disclosure guidance, defines fair value as the price that would be received to sell the asset or transfer the liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. Additional guidance is provided on determining when the volume and level of activity for the asset or liability has significantly decreased. The Topic also includes guidance on identifying circumstances when a transaction may not be considered orderly.

Fair value measurement and disclosure provides a list of factors that a reporting entity should evaluate to determine whether there has been a significant decrease in the volume and level of activity for the asset or liability in relation to normal market activity for the asset or liability. When the reporting entity concludes there has been a significant decrease in the volume and level of activity for the asset or liability, further analysis of the information from that market is needed and significant adjustments to the related prices may be necessary to estimate fair value in accordance with fair value measurement and disclosure guidance.

ASC Topic 820 clarifies that when there has been a significant decrease in the volume and level of activity for the asset or liability, some transactions may not be orderly. In those situations, the entity must evaluate the weight of the evidence to determine whether the transaction is orderly. This Topic provides a list of circumstances that may indicate that a transaction is not orderly. A transaction price that is not associated with an orderly transaction is given little, if any, weight when estimating fair value.

Fair value measurement and disclosure establishes a fair value hierarchy that prioritizes the inputs to valuation methods used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows:

Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

Level 2: Quoted prices in markets that are not active, or inputs that are observable either directly or indirectly, for substantially the full term of the asset or liability.

Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported with little or no market activity).

40

FIRST COMMUNITY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 13—FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)

An asset’s or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.

The following describes the valuation techniques used by the Corporation to measure certain financial assets and liabilities recorded at fair value on a recurring basis in the financial statements:

Securities available for sale: Securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted market prices, when available (Level 1). If quoted market prices are not available, fair values are measured utilizing independent valuation techniques of identical or similar securities for which significant assumptions are derived primarily from or corroborated by observable market data. Third party vendors compile prices from various sources and may determine the fair value of identical or similar securities by using pricing models that consider observable market data (Level 2). For certain securities which are not traded in active markets or are subject to transfer restrictions, valuations are adjusted to reflect illiquidity and/or transferability, and such adjustments are generally based on available market evidence (Level 3).

For financial assets measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy used at December 31, 2011 and 2010 are as follows (in thousands):

Description	December 31, 2011		(Level 1) Quoted Prices in Active Markets for Identical Assets		(Level 2) Significant Other Observable Inputs		(Level 3) Significant Unobservable Inputs
U. S. agency securities	$	5,665	$	—	$	5,665	$	—
Mortgage-backed securities		65,312		—		65,312		—
Corporate securities		1,772				1,772
Equity securities		1,055		460		—		595
Securities available for sale	$	73,804	$	460	$	72,749	$	595

41

FIRST COMMUNITY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 13—FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)

Description	December 31, 2010		(Level 1) Quoted Prices in Active Markets for Identical Assets		(Level 2) Significant Other Observable Inputs		(Level 3) Significant Unobservable Inputs
U. S. agency securities	$	9,918	$	—		9,918	$	—
Mortgage-backed securities		64,660		—		64,660		—
Equity securities		1,049		460		—		589
Securities available for sale	$	75,627	$	460	$	74,578	$	589

The table below presents a reconciliation and income statement of gains and losses for available for sale securities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the periods ending December 31, 2011 and December 31, 2010.

	2011		2010
Fair Value, beginning of year	$	589	$	508
Total gains (losses) included in other comprehensive income		6		81
Purchases		—		—
Fair Value, end of year	$	595	$	589

The following describes the valuation techniques used by the Corporation to measure certain financial assets recorded at fair value on a nonrecurring basis in the financial statements:

Impaired Loans: Loans are designated as impaired when, in the judgment of management based on current information and events, it is probable that all amounts due according to the contractual terms of the loan agreement will not be collected. The measurement of loss associated with impaired loans can be based on either the observable market price of the loan or the fair value of the collateral. Fair value is measured based on the value of the collateral securing the loans. Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable. The value of real estate collateral is determined utilizing an income or market valuation approach based on an appraisal conducted by an independent, licensed appraiser outside of the Corporation using observable market data (Level 2). However, if the collateral is a house or building in the process of construction or if an appraisal of the real estate property is over two years old, then the fair value is considered Level 3. The value of business equipment is based upon an outside appraisal if deemed significant, or the net book value on the applicable business’ financial statements if not considered significant using observable market data. Likewise, values for inventory and accounts receivables collateral are based on financial statement balances or aging reports (Level 3). Impaired loans allocated to the Allowance for Loan Losses are measured at fair value on a non-recurring basis. Any fair value adjustments are recorded in the period incurred as provision for loan losses on the Consolidated Statements of Income.

42

FIRST COMMUNITY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 13—FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)

Certain assets such as real estate owned are measured at fair value less the cost to sell. Management believes that the fair value component in its valuation follows the provisions of ASC 820.

Assets measured at fair value on a non-recurring basis at December 31, 2011 and 2010 are summarized below:

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

Description	December 31, 2010		(Level 1) Quoted Prices in Active Markets for Identical Assets		(Level 2) Significant Other Observable Inputs		(Level 3) Significant Unobservable Inputs
Impaired loans	$	84	$	—	$	—	$	84
Foreclosed real estate		133		—		—		133

Total impaired loans, which are measured for impairment using the fair value of the collateral for collateral-dependent loans, had a carrying amount of $5,242,000 and $99,000, net of the valuation allowances of $966,000 and $15,000 as of December 30, 2011 and December 31, 2010, respectively. This resulted in additional provision for loan losses of $803,000 for the period ending December 31, 2011 and $0 for the period ending December 31, 2010.

ASC Topic 825, Financial Instruments, requires disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements.

The following information should not be interpreted as an estimate of the fair value of the entire Corporation since a fair value calculation is only provided for a limited portion of the Corporation’s assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Corporation’s disclosures and those of other companies may not be meaningful. The following methods and assumptions were used to estimate the fair values of the Corporation’s financial instruments at December 31, 2011 and December 31, 2010.

Cash and cash equivalents:

The carrying amounts reported in the balance sheet for cash and short-term instruments approximate those assets’ fair values.

43

FIRST COMMUNITY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 13—FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)

Time certificates of deposit:

The carrying amount of time certificates of deposit approximate their fair value.

Securities:

For securities and marketable equity securities held for investment purposes, fair values are based on quoted market prices or dealer quotes. For other securities held as investments, fair value equals quoted market price, if available. If a quoted market price is not available, fair values are based on quoted market prices for similar securities. For securities which are not traded in active markets or are subject to transfer restrictions, valuations are generally based on available market evidence.

Loans receivable:

For variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. The fair values of fixed rate loans are estimated using discounted cash flow analyses, using interest rates currently being offered in the market for loans with similar terms to borrowers of similar credit quality. Fair values for nonperforming loans are estimated using discounted cash flow analyses or underlying collateral values, where applicable.

Restricted investment in bank stock:

The carrying amount of restricted investment in bank stock approximates fair value.

Accrued interest receivable and payable:

The carrying amount of accrued interest receivable and accrued interest payable approximates its fair value.

Deposit liabilities:

The fair values disclosed for demand deposits (e.g., interest and non-interest checking, passbook savings and money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered in the market on certificates to a schedule of aggregated expected monthly maturities on time deposits.

Short-term borrowings:

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

Long-term debt:

Fair values of long-term debt are estimated using discounted cash flow analysis, based on rates currently available to the Corporation for advances from the FHLB with similar terms and remaining maturities.

Junior Subordinated debt:

Fair values of junior subordinated debt are estimated using discounted cash flow analysis, based on rates currently offered on such debt, with similar terms and remaining maturities. As the Corporation has the ability to redeem the junior subordinated debt at any time, the fair value approximates its carrying value.

44

FIRST COMMUNITY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 13—FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)

Off-balance sheet financial instruments:

Fair values for the Corporation’s off-balance sheet financial instruments (lending commitments and letters of credit) are based on fees currently charged to enter into similar agreements, taking into account, the remaining terms of the agreements and the counterparties’ credit standing.

The estimated fair values of the Corporation’s financial instruments were as follows at December 31, 2011 and 2010.

	2011				2010
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
	(In Thousands)
Financial assets:
Cash and cash equivalents	$	9,938	$	9,938	$	10,554	$	10,554
Time certificates of deposit		198		198		198		198
Investment securities:
Available for sale		73,804		73,804		75,627		75,627
Held to maturity		34,972		36,639		31,872		30,976
Loans, less allowance for loan losses		247,703		250,707		236,231		237,323
Accrued interest receivable		1,417		1,417		1,337		1,337
Restricted investment in bank stocks		2,121		2,121		2,541		2,541
Total financial assets	$	370,153	$	374,824	$	358,360	$	358,556
Financial liabilities:
Deposits	$	330,549	$	335,041	$	317,849	$	322,934
Short-term borrowings		2,685		2,685		4,030		4,030
Long-term debt		15,000		16,799		16,000		17,561
Junior subordinated debt		5,155		5,155		5,155		5,155
Accrued interest payable		298		298		329		329
Total financial liabilities	$	353,687	$	359,978	$	343,363	$	350,009
Off-balance sheet financial instruments		—		—		—		—

NOTE 14—CONTINGENCIES

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

45

FIRST COMMUNITY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 15—CONDENSED FINANCIAL INFORMATION FOR PARENT COMPANY ONLY

BALANCE SHEETS

	December 31,
	2011		2010
	(In Thousands)
ASSETS
Cash	$	128	$	117
Investment in bank subsidiary		35,431		32,265
Investment in unconsolidated subsidiary trust		155		155
Securities available for sale		1,055		1,049
Other assets		31		46
Total Assets	$	36,800	$	33,632
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities	$	207	$	195
Junior subordinated debt		5,155		5,155
Shareholders’ equity		31,438		28,282
Total Liabilities and Shareholders’ Equity	$	36,800	$	33,632

STATEMENTS OF INCOME

	Years Ended December 31,
	2011		2010
	(In Thousands)
Dividends from bank subsidiary	$	1,055	$	996
Other dividends		42		42
Realized gains on sales of securities		8		—
		1,105		1,038
Expenses		206		193
		899		845
Equity in undistributed earnings in bank subsidiary		3,247		2,841
Net Income	$	4,146	$	3,686

46

FIRST COMMUNITY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 15—CONDENSED FINANCIAL INFORMATION FOR PARENT COMPANY ONLY (CONTINUED)

STATEMENTS OF CASH FLOWS

	Years Ended December 31,
	2011			2010
	(In Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	4,146		$	3,686
Equity in undistributed earnings of bank subsidiary		(3,247	)		(2,841	)
Realized gains on sales of securities		(8	)		—
Decrease in other assets		15			15
Increase in other liabilities		2			1
Net Cash Provided by Operating Activities		908			861
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of securities available for sale		—			—
Proceed from sales of securities		29			—
Net Cash Available from (Used in) Investing Activities		29			—
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock		128			80
Acquisition of treasury stock		—			—
Cash dividends paid		(1,054	)		(946	)
Net Cash Used in Financing Activities		(926	)		(866	)
Net Increase (Decrease) in Cash		11			(5	)
CASH—BEGINNING		117			122
CASH—ENDING	$	128		$	117

47

FIRST COMMUNITY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 16—QUARTERLY FINANCIAL DATA (UNAUDITED)

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

	Three Months Ended
	December 31		September 30		June 30		March 31
	(In Thousands, Except per Share Amounts)
2011:
Interest income	$	4,657	$	4,651	$	4,547	$	4,536
Interest expense		1,383		1,393		1,505		1,533
Net interest income		3,274		3,258		3,042		3,003
Provision for loan losses		528		303		127		24
Provision for income taxes		234		290		319		252
Net income		974		1,090		1,092		990
Net income per share, basic		0.68		0.78		0.78		0.71
2010:
Interest income	$	4,638	$	4,583	$	4,555	$	4,405
Interest expense		1,587		1,605		1,728		1,909
Net interest income		3,051		2,978		2,827		2,496
Provision for loan losses		133		89		94		20
Provision for income taxes		312		307		227		207
Net income		1,054		1,000		840		792
Net income per share, basic		0.75		0.71		0.60		0.57

48

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 First Community Financial Corporation (the Corporation) and should be read in conjunction with the accompanying financial statements and other financial data included elsewhere in this report.

FORWARD-LOOKING STATEMENTS

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

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

49

EXECUTIVE SUMMARY

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

CRITICAL ACCOUNTING POLICIES

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

The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America, which require the Corporation to make estimates and assumptions (see Note 1 to the financial statements). The Corporation believes that of its significant accounting policies, the allowance for loan losses and valuation of its securities may involve a higher degree of judgment and complexity.

The allowance for loan losses is established through a charge to earnings for the provision for loan losses. In determining the balance in the allowance for loan losses, consideration is given to a variety of factors in establishing this estimate. In estimating the allowance for loan losses, management considers current economic conditions, diversification of the loan portfolio, delinquency statistics, results of internal loan reviews, borrowers’ perceived financial and managerial strengths, the adequacy of the underlying collateral, if collateral dependent, or present value of future cash flows and other relevant factors. The use of different estimates or assumptions could produce different provisions for loan losses. Additional information is provided in the “Provision for Loan Losses” and “Allowance for Loan Losses” sections.

Declines in the fair value of securities held to maturity and available for sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses. Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) for equity securities, the intent and ability of the Corporation to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. For debt securities, management considers whether (1) it has the intent to sell the security and (2) it is more likely than not that it will be required to sell the security prior to its anticipated recovery.

OVERVIEW

In 2011, the Corporation recorded net income of $4,146,000, an increase of $460,000 or 12.5%, from net income of $3,686,000 in 2010.

The increase in net income during 2011 as compared to 2010 is primarily a result of the following:

• Increase in net interest income, after provision for loan losses, of $579,000;

• Increase in total other income of $304,000;

• Increase in total other expenses of $381,000; and

• Increase in provision for income taxes of $42,000.

Basic earnings per share were $2.95 in 2011 compared to $2.63 in 2010. Return on average equity for 2011 was 13.80% compared to 13.71% in 2010. Return on average assets was 1.10% for 2011 compared with 1.01% in 2010.

50

OVERVIEW (CONTINUED)

During 2011, the Corporation experienced $11,472,000, or 4.9%, growth in net loans, a $1,277,000 increase in securities and $12,700,000, or 4.0%, growth in deposits. These increases were offset by a $2,345,000, or 11.7%, decrease in borrowings. As a result of these trends total assets of the Corporation grew by $13,728,000, or 3.7%.

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. The FTE basis is calculated by grossing up the yield on tax-exempt securities and loans by the Federal tax rate of 34%, in order that the yield on tax-exempt assets may be comparable to interest earned on taxable assets. The factors that affect net interest income include changes in interest rates and changes in average balances of interest-earning assets and interest-bearing liabilities. Net interest income on an FTE basis increased to $13,550,000 in 2011 from $12,165,000 in 2010 and $10,434,000 in 2009.

51

NET INTEREST INCOME AND NET INTEREST MARGIN (CONTINUED)

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

Average Balances, Rates and Interest Income and Expense

(Dollars in Thousands)

		0000000		0000000		0000000			0000000		0000000		0000000			0000000		0000000		0000000
	2011							2010							2009
	Average Balance		Interest		Yield/ Rate			Average Balance		Interest		Yield/ Rate			Average Balance		Interest		Yield/ Rate
ASSETS
INTEREST EARNING ASSETS
Securities:
Taxable	$	71,675	$	2,237		3.12	%	$	75,843	$	2,481		3.27	%	$	70,907	$	3,149		4.44	%
Tax-exempt		32,928		2,095		6.36	%		29,392		1,953		6.64	%		27,062		1,755		6.49	%
Total Securities		104,603		4,332		4.14	%		105,235		4,434		4.21	%		97,969		4,904		5.01	%
Other		5,451		31		0.57	%		7,693		41		0.53	%		9,251		54		0.58	%
Loans:
Taxable		228,761		14,234		6.22	%		218,264		14,080		6.45	%		210,266		13,918		6.62	%
Tax-exempt		12,203		767		6.29	%		7,034		439		6.24	%		4,476		341		7.62	%
Total Loans		240,964		15,001		6.23	%		225,298		14,519		6.44	%		214,742		14,259		6.64	%
Total Interest Earning Assets		351,018		19,364		5.52	%		338,226		18,994		5.62	%		321,962		19,217		5.97	%
Non-interest earnings assets		26,837							25,416							22,563
Total Assets	$	377,855						$	363,642						$	344,525
LIABILITIES AND SHAREHOLDERS’  EQUITY
INTEREST BEARING LIABILITIES
Demand deposits, interest bearing	$	27,633	$	44		0.16	%	$	25,635	$	43		0.17	%	$	24,124	$	48		0.20	%
Savings deposits		105,308		941		0.89	%		85,904		878		1.02	%		40,253		506		1.26	%
Time deposits		156,126		3,997		2.56	%		166,458		4,907		2.95	%		192,597		6,940		3.60	%
Total Interest Bearing Deposits		289,067		4,982		1.72	%		277,997		5,828		2.10	%		256,974		7,494		2.92	%
Short-term borrowings		3,215		39		1.21	%		4,521		52		1.15	%		4,612		50		1.08	%
Long-term debt		20,377		793		3.89	%		23,248		949		4.08	%		27,155		1,239		4.56	%
Total Interest Bearing Liabilities		312,659		5,814		1.86	%		305,766		6,829		2.23	%		288,741		8,783		3.04	%
Demand deposits, non-interest bearing		32,252							28,341							28,443
Other liabilities		2,902							2,656							2,766
Shareholders’ equity		30,042							26,879							24,575
Total Liabilities and Shareholders’ Equity	$	377,855						$	363,642						$	344,525
NET INTEREST INCOME			$	13,550						$	12,165						$	10,434
INTEREST RATE SPREAD						3.66	%						3.38	%						2.93	%
NET INTEREST MARGIN						3.86	%						3.60	%						3.24	%

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 $(29,000) in 2011, $(43,000) in 2010, and $(13,000) in 2009.

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

52

NET INTEREST INCOME AND NET INTEREST MARGIN (CONTINUED)

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

Rate/Volume Analysis

(In Thousands)

	2011 versus 2010									2010 versus 2009
	Change Due to									Change Due to
	Rate			Volume			Total			Rate			Volume			Total
INTEREST EARNING ASSETS
Securities:
Taxable	$	(114	)	$	(130	)	$	(244	)	$	(829	)	$	161		$	(668	)
Tax-exempt		(83	)		225			142			43			155			198
Other		(1	)		(9	)		(10	)		(2	)		(11	)		(13	)
Total loans		(496	)		978			482			(416	)		676			260
Total		(694	)		1,064			370			(1,204	)		981			(223	)
INTEREST BEARING LIABILITIES
Demand deposits, interest bearing		(2	)		3			1			(8	)		3			(5	)
Savings deposits		(110	)		173			63			(95	)		467			372
Time deposits		(645	)		(265	)		(910	)		(1,262	)		(771	)		(2,033	)
Short-term borrowings		3			(16	)		(13	)		3			(1	)		2
Long-term debt		(44	)		(112	)		(156	)		(131	)		(159	)		(290	)
Total		(798	)		(217	)		(1,015	)		(1,493	)		(461	)		(1,954	)
Net Interest Income	$	104		$	1,281		$	1,385		$	289		$	1,442		$	1,731

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.

2011 VERSUS 2010

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

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

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

2010 VERSUS 2009

During 2010, tax equivalent interest income decreased by $223,000 as the result of a decrease in the yield on earning assets of 0.35% offset by an increase in earning assets. Average loans increased $10,556,000 impacting interest income by $676,000 and the yield on loans decreased 0.20% reducing interest income by $416,000. Total average securities increased $7,266,000 increasing interest income $316,000 and the yield on securities decreased 0.79% decreasing interest income $786,000.

53

NET INTEREST INCOME AND NET INTEREST MARGIN (CONTINUED)

Total average interest-bearing liabilities grew by $17,025,000 between 2010 and 2009 but the average rate paid on interest-bearing liabilities decreased 0.81% decreasing interest expense by $1,954,000.

The net interest margin is the ratio of net interest income to interest-earning assets, reflecting a net yield on earning assets. The 0.36% increase in net interest margin from 2009 to 2010 reflects the decrease in rates on interest-bearing liabilities out-pacing the decrease in rates on interest-earning assets.

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 $982,000 provision for loan losses in 2011 compared to $336,000 in 2010. Provisions for loan losses are charged to income to bring the allowance for loan losses to a level deemed appropriate by management based on the factors discussed under the “Allowance for Loan Losses” section. Based on that analysis, the level of the allowance for loan losses is considered by management to be appropriate at this time.

OTHER INCOME

2011 VERSUS 2010

Other income of $3,063,000 during 2011 increased by $304,000, or 11.0%, compared to 2010, primarily as a result of the following:

• An increase in income from fiduciary activities of $51,000.

• A decrease in investment securities gains of $170,000.

• An increase in earnings on investment in life insurance of $101,000.

• An increase in other income of $359,000.

OTHER EXPENSES

2011 VERSUS 2010

Other expenses increased $381,000, or 4.2%, to $9,417,000 during 2011 compared to $9,036,000 during 2010, primarily as a result of the following:

• An increase in employee compensation and benefits of $364,000 as the result of increases in the number of staff and merit increases during the year.

• A decrease in ATM expense of $66,000.

54

OTHER EXPENSES (CONTINUED)

• A decrease in FDIC/OCC expense of $194,000 as the result of the change in the assessment base.

• An increase in other operating expenses of $182,000.

INCOME TAXES

Income tax expense was $1,095,000 for 2011 compared to $1,053,000 for 2010 and $416,000 for 2009. Income tax expense as a percentage of income before income taxes was 20.9% for 2011 and 22.2% for 2010. The actual effective rate deviates from the 34% statutory rate due to tax exempt interest income and income earned on cash surrender value of life insurance. The Corporation’s lower effective tax rate in 2011 was a result of an increase in the percentage of pre-tax income being derived from tax-exempt investments and loans and tax-exempt income earned on life insurance. Refer to Note 9 to the consolidated financial statements for further analysis of income taxes.

FINANCIAL CONDITION

SECURITIES

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

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

The Corporation generally intends to hold its investment portfolio until maturity; however, about 67.8%, or $73,804,000, of total securities at December 31, 2011 was classified as available for sale. Net unrealized gains at year-end 2011 were $2,032,000 compared to $2,126,000 at year-end 2010. The net unrealized gain at December 31, 2011 is reflected as accumulated other comprehensive income of $1,316,000 in shareholders’ equity, net of deferred income taxes compared to $1,380,000 at December 31, 2010. This decrease reflects changes in interest rates and volume during 2011. Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) for equity securities, the intent and ability of the Corporation to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. For debt securities, management considers whether (1) it has the intent to sell the security and (2) it is more likely than not that it will be required to sell the security prior to its anticipated recovery. For additional information on unrealized losses by investment type, see Note 3 to the consolidated financial statements.

Held to maturity securities totaled $34,972,000 at December 31, 2011 compared to $31,872,000 a year ago. The increase was a result of new purchases exceeding maturities of state and municipal securities. This portion of the portfolio is comprised of state and municipal securities that provide tax-exempt interest income to the Corporation.

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:

55

SECURITIES (CONTINUED)

Investment Securities

(In Thousands)

	2011		2010		2009
AVAILABLE FOR SALE SECURITIES AT FAIR VALUE
U.S. Government agencies	$	5,665	$	9,918	$	12,231
Mortgage-backed securities		65,312		64,660		68,234
Corporate securities		1,772		—		—
Stock in other banks		1,055		1,049		972
Total		73,804		75,627		81,437
HELD TO MATURITY SECURITIES AT AMORTIZED COST
U.S. Government agencies		—		—		250
State and municipal		34,972		31,872		29,954
		34,972		31,872		30,204
Total	$	108,776	$	107,499	$	111,641

The scheduled maturities of the securities portfolio at December 31, 2011 is as follows:

Securities Maturity Schedule

(Dollars in Thousands)

	1 Year or Less					Over 1-5 Years					Over 5-10 Years					Over 10 Years or no Maturity					Total
	Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield
U.S. Government agencies	$	1,002		1.00	%	$	4,663		3.37	%	$	—		—	%	$	—		—	%	$	5,665		2.95	%
Corporate securities		—					924		1.71			848		2.53			—					1,772		2.10
State and municipal		—		—			10,473		5.35			14,165		6.30			10,334		7.13			34,972		6.26
Mortgage-backed securities		—		—			—		—			—		—			65,312		3.05			65,312		3.05
Equity securities		—		—			—		—			—		—			1,055		—			1,055		—
Total	$	1,002		1.00	%	$	16,060		4.57	%	$	15,013		6.09	%	$	76,701		3.56	%	$	108,776		4.04	%

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%.

LOANS

Loans at December 31 were as follows:

	2011		2010		2009		2008		2007
	(In Thousands)
Commercial, financial and agricultural	$	44,811	$	39,021	$	32,369	$	22,944	$	17,523
Real estate:
Commercial		47,362		46,090		37,842		41,227		38,327
Construction		3,554		2,464		5,057		5,730		1,435

56

LOANS (CONTINUED)

	2011			2010			2009			2008			2007
	(In Thousands)
Residential		150,248			145,950			139,055			138,209			129,563
Installment		5,037			5,071			5,339			6,159			5,946
Total		251,012			238,596			219,662			214,269			192,794
Allowance for loan losses		(3,085	)		(2,154	)		(2,830	)		(1,633	)		(1,249	)
Deferred loan fees and costs, net		(224	)		(211	)		(232	)		(259	)		(320	)
Net loans	$	247,703		$	236,231		$	216,600		$	212,377		$	191,225

The loan portfolio comprises the major portion of the Corporation’s earning assets. The increase in loans of $11,472,000, or 4.9%, during 2011 was attributable to the following: Commercial, financial, and agricultural loans grew by $5,790,000, residential real estate grew by $4,298,000, commercial real estate increased by $1,272,000 and construction loans increased by $1,090,000.

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

Loan Maturities—Commercial and Construction Loans

(In Thousands)

	Less than 1 Year		1-5 Years		Over 5 Years		Total
Commercial, financial and agricultural	$	13,113	$	7,969	$	23,729	$	44,811
Real estate:
Commercial		3,661		3,364		40,337		47,362
Construction		2,826		50		678		3,554
Total	$	19,600	$	11,383	$	64,744	$	95,727
Loans with a fixed interest rate	$	9,898	$	8,721	$	14,710	$	33,329
Loans with a variable interest rate		9,702		2,662		50,034		62,398
Total	$	19,600	$	11,383	$	64,744	$	95,727

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 economic conditions and collection efforts. Loans are returned to accrual status only when all factors indicating doubtful collectability cease to exist. Troubled debt restructurings result when an economic concession has been made to a borrower taking the form of

57

NON-PERFORMING ASSETS (CONTINUED)

a reduction or deferral of interest and/or principal. As of December 31, 2011, the Corporation had two troubled debt restructurings totaling $4,477,000 of which $3,192,000 carries an 80% USDA guarantee, both of which are performing and not included in non-performing assets. Management will continue to monitor these credits and adjustments to the reserve may occur in the future. Potential problem loans include impaired loans which, as of December 31, 2011, totaled $5,242,000, including the above mentioned troubled debt restructurings. These impaired loans constitute the entire relationships with these three customers. At this time, no losses in excess of the valuation allowance is anticipated. Foreclosed real estate is acquired through foreclosure or in lieu of foreclosure and is recorded at fair value at the date of foreclosure establishing a new cost basis. Gains on the sale of foreclosed real estate are included in other income, while losses and writedowns resulting from periodic revaluations are included in other expenses.

The following table sets forth the Corporation’s non-performing assets as of the dates indicated:

Non-Performing Assets

(Dollars in Thousands)

	2011			2010			2009			2008			2007
Non-accrual loans	$	644		$	1,016		$	4,254		$	2,623		$	1,976
Total Non-Performing Loans		644			1,016			4,254			2,623			1,976
Foreclosed real estate		358			133			122			—			—
Total Non-Performing Assets	$	1,002		$	1,149		$	4,376		$	2,623		$	1,976
Troubled debt restructurings	$	4,477		$	1,312		$	2,305		$	—		$	—
Other impaired loans	$	765		$	297		$	348		$	635		$	1,812
Ratios:
Non-performing loans to total loans		.26	%		.43	%		1.96	%		1.24	%		1.03	%
Non-performing assets to total loans and foreclosed real estate		.40	%		.49	%		2.02	%		1.24	%		1.03	%
Non-performing loans to allowance for loan losses		20.88	%		47.17	%		150.32	%		160.62	%		158.21	%
Non-accrual loans:
Interest income that would have been recorded under original terms		53			13			143			91			159
Interest income recorded during the year		45			21			115			23			98

Total non-performing assets at year-end 2011 decreased $147,000 primarily as a result of the decrease in loans in non-accrual status offset by an increase in foreclosed real estate.

58

ALLOWANCE FOR LOAN LOSSES

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

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

The Bank’s evaluation of the adequacy of the allowance for loan losses includes a review of all loans on at least a quarterly basis. For residential mortgage loans and consumer loans, the primary factors used to determine the adequacy of the allowance are delinquency, collateral value, general economic conditions and, where applicable, individual borrower information that is known to the Bank. For commercial loans and commercial real estate loans, the review includes financial performance of the borrower, payment history, collateral value, general economic conditions and more specific economic conditions affecting specific industries or business activities of the borrowers within the portfolio agreements.

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

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

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

Analysis of Allowance for Loan Losses

(Dollars in Thousands)

	Years Ended December 31,
	2011		2010		2009		2008			2007
Beginning balance	$	2,154	$	2,830	$	1,633	$	1,249		$	1,230
Provision for loan losses		982		336		1,237		365			60
Loans charged off:
Commercial, financial and agricultural		45		1		7		—			—
Real estate		24		1,002		5		—			21
Installment		4		33		29		9			22
Total Charged-off		73		1,036		41		9			43
Recoveries:
Commercial, financial and agricultural		11		—		—		—			—
Real estate		8		18		—		24			—
Installment		3		6		1		4			2
Total Recoveries		22		24		1		28			2
Net charge-offs (recoveries)		51		1,012		40		(19	)		41
Ending balance	$	3,085	$	2,154	$	2,830	$	1,633		$	1,249

59

ALLOWANCE FOR LOAN LOSSES (CONTINUED)

	Years Ended December 31,
	2011			2010			2009			2008			2007
Ratios:
Net charge-offs (recoveries) to average loans		0.02	%		0.45	%		0.02	%		(0.01	)%		0.02	%
Allowance for loan losses to total loans		1.23	%		0.90	%		1.29	%		0.76	%		0.65	%

Allocation of the Allowance for Loan Losses

(Dollars in Thousands)

	2011					2010					2009					2008					2007
	Amount		Percent of Loan Type to Total Loans			Amount		Percent of Loan Type to Total Loans			Amount		Percent of Loan Type to Total Loans			Amount		Percent of Loan Type to Total Loans			Amount		Percent of Loan Type to Total Loans
Commercial, financial and agricultural	$	966		17.85	%	$	730		16.35	%	$	575		14.74	%	$	403		10.71	%	$	357		9.09	%
Real estate:
Commercial		1,305		18.87			630		19.32			1,333		17.23			334		19.24			449		19.88
Construction		—		1.41			—		1.03			—		2.30			—		2.67			—		0.75
Residential		728		59.86			702		61.17			697		63.30			692		64.50			262		67.20
Installment		86		2.01			92		2.13			114		2.43			126		2.88			142		3.08
Unallocated		—		N/A			—		N/A			111		N/A			78		N/A			39		N/A
Total	$	3,085		100.00	%	$	2,154		100.00	%	$	2,830		100.00	%	$	1,633		100.00	%	$	1,249		100.00	%

Management believes the allowance for loan losses at December 31, 2011 and 2010 is adequate to absorb losses inherent in the loan portfolio. Although management believes that it uses the best information available to make such determinations, future adjustments to the allowance for loan losses may be necessary, and the results of operations could be significantly and adversely affected if circumstances differ substantially from the assumptions used in making the determinations. Furthermore, while the Bank believes it has established its existing allowance for loan losses in accordance with accounting principles generally accepted in the United States of America, there can be no assurance that the Office of the Comptroller of the Currency or the Federal Reserve Board, in reviewing our loan portfolio, will not request us to increase our allowance for loan losses. In addition, because future events affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that the existing allowance for loan losses is adequate or that material increases will not be necessary should the quality of loans deteriorate as a result of factors discussed above. Any material increase in the allowance for loan losses may adversely affect the Bank’s financial condition and results of operations.

DEPOSITS

Management believes that the development and retention of deposits is the basis of sound growth and profitability. These deposits provide the primary source of funding for loans and investments. The Corporation’s continued expansion and business development within its market area fueled the growth in deposits. As of December 31, 2011, deposits totaled $330,549,000 up $12,700,000 or 4.0%, from year-end 2010. Savings deposits contributed most of the growth with $13,497,000. Demand deposits increased $4,499,000 and time deposits decreased $5,296,000. The growth in deposits resulted primarily from continuing bank-wide promotions of its money market account.

60

BORROWINGS

Short-term borrowings at December 31 were as follows:

		00000000000			00000000000			00000000000
	2011			2010			2009
	(Dollars in Thousands)
Amount outstanding at end of year:
Federal funds purchased	$	—		$	—		$	—
Securities sold under agreements to repurchase		2,685			3,930			4,415
Short-term FHLB advances		—			—			—
Treasury tax and loan note		—			100			97
Total	$	2,685		$	4,030		$	4,512
Weighted average interest rate at end of year		1.33	%		1.17	%		1.14	%
Maximum amount outstanding at any end of month	$	5,194		$	4,455		$	6,440
Daily average amount outstanding		3,215			4,521			4,612
Approximate weighted average interest rate for the year		1.21	%		1.15	%		1.08	%

Long-term debt at December 31 was as follows:

		00000000000			00000000000			00000000000
	2011			2010			2009
	(Dollars in Thousands)
Amount outstanding at end of year:
FHLB advances	$	15,000		$	16,000		$	22,000
Junior subordinated debt		5,155			5,155			5,155
Total	$	20,155		$	21,155		$	27,155
Weighted average interest rate at end of year		3.85	%		3.92	%		4.45	%
Daily average amount outstanding		20,377			23,248			27,155
Approximate weighted average interest rate for the year		3.89	%		4.08	%		4.56	%

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

OFF-BALANCE SHEET ARRANGEMENTS

The Corporation is party to financial instruments with off-balance sheet risk entered into in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and, to a lesser extent, standby letters of credit. At December 31, 2011, the Corporation had unfunded outstanding commitments to extend credit of $33.3 million and outstanding standby letters of credit of $110,000. Because these commitments generally have fixed expiration dates and many will expire without being drawn upon, the total commitment level does not necessarily represent future cash requirements. The current amount of liability as of December 31, 2011 and 2010 for guarantees under standby letters of credit is not material. Refer to Note 12 of the consolidated financial statements for a discussion of the nature, business purpose and importance of the Corporation’s off-balance sheet arrangements.

61

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 deposit base and a strong capital position. The stability of the deposits is reflected in a comparison of year-end balances to yearly averages. Deposits at year-end 2011 totaled $330,549,000 and averaged $321,319,000 for the year. Likewise, year-end 2010 deposits totaled $317,849,000 and averaged $306,338,000 for the year. Other sources of liquidity are available from investment securities maturing in one year or less, which totaled $1,000,000 at year-end 2011 and from investments in mortgage-backed securities, which supply income and principal cash flow streams on an ongoing basis. Mortgage-backed securities represented 59.6% of the total amortized cost of securities as of December 31, 2011. These sources are believed by management to provide the Corporation with adequate resources to meet its short-term liquidity requirements. Longer term liquidity needs may include selling securities available for sale, which had a fair value of $73,804,000 at December 31, 2011, selling loans or raising additional capital. In addition, the Corporation has established federal funds lines of credit at the Federal Home Loan Bank of Pittsburgh and the Atlantic Central Bankers Bank, which are reliable sources for short and long-term funds. The maximum borrowing capacity through the Federal Home Loan Bank was approximately $126,532,000 at December 31, 2011, of which $111,532,000, or 88.1%, was available.

The Corporation’s average loan to deposit ratio for 2011 was 75.0% and ended the year at 74.9%, compared to an average of 73.5% in 2010 and 73.1% at the end of 2009.

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, 2011 totaled $33.3 million and standby letters of credit totaled $110,000.

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

The greater the capital resources, the more likely the Corporation will be able to meet its cash obligations and unforeseen expenses. The Corporation’s strong capital position is related to the Corporation’s earnings stability. The dividend payout ratio was 25.4% in 2011, compared to 25.7% in 2010. Shareholders’ equity at the end of 2011 totaled $31,438,000, an increase of $3,156,000, or 11.2%, over year-end 2010. The increase was a result of net income, a decrease in the unrealized gain on securities available for sale, net of taxes of $64,000 and an increase in common stock and surplus of $128,000 as a result of our dividend reinvestment plan, partially offset by the dividend payout of $1,054,000. Likewise, shareholders’ equity at the end of 2010 totaled $28,282,000, an increase of $2,924,000, or 11.5%, over year-end 2009. The increase was a result of net income, an increase in the unrealized gain on securities available for sale, net of taxes of $104,000, an increase in common stock and surplus of $80,000 as a result of our dividend reinvestment plan, partially offset by the dividend payout of $946,000.

The table in Note 11 to the financial statements sets forth the Corporation’s and Bank’s capital ratios as of December 31, 2011 and 2010. These ratios show that the Bank exceeded the federal regulatory minimum requirements for a “well capitalized bank” at such dates. The minimum regulatory requirements of a “well capitalized bank” for the leverage ratio, Tier 1 and total risk-based capital ratios are 5.00%, 6.00% and 10.00%, respectively.

The Corporation’s ability to meet its expenses and pay dividends to its shareholders is dependent on the cash dividends it receives from the Bank. Certain restrictions exist regarding the ability of the Bank to transfer funds to the Corporation in the form of cash dividends, loans or advances. Regulatory approval is required if the total of all dividends declared by a national bank in any calendar year exceeds net profits (as defined) for that year combined with the retained net profits for the two preceding calendar years. At December 31, 2011,

62

LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)

approximately $7,532,000 of undistributed earnings of the Bank, included in consolidated shareholders’ equity, was available for distribution to the Corporation as dividends without prior regulatory approval.

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

On January 8, 2008, the Board of Directors of the Corporation authorized a stock repurchase program pursuant to which the Corporation is authorized to purchase up to 7.1% of its outstanding shares or 100,000 shares. Share repurchases will be made from time to time and may be effected through open market purchases, block trades, or in privately negotiated transactions. As of December 31, 2011, the Corporation has purchased 3,656 shares under this repurchase program.

INFLATION

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

63

Summary of Selected Financial Data

(Amounts in Thousands, Except Per Share Data)

		000000000			000000000			000000000			000000000			000000000
	2011			2010			2009			2008			2007
Income Statement Data
Net interest income	$	12,577		$	11,352		$	9,721		$	9,004		$	7,308
Provision for loan losses		982			336			1,237			365			60
Gains on sales of securities		12			182			459			—			—
Other income		3,051			2,577			2,496			2,296			2,107
Other expenses		9,417			9,036			8,797			7,978			6,838
Income before Income Taxes		5,241			4,739			2,642			2,957			2,517
Income tax expense		1,095			1,053			416			621			500
Net Income	$	4,146		$	3,686		$	2,226		$	2,336		$	2,017
Balance Sheet Data (Period End)
Total assets	$	387,883		$	374,155		$	355,836		$	326,714		$	302,295
Loans, net		247,703			236,231			216,600			212,377			191,225
Investments:
Held to maturity		34,972			31,872			30,204			24,127			21,229
Available for sale		73,804			75,627			81,437			66,376			63,340
Deposits		330,549			317,849			296,459			262,606			245,046
Short-term borrowings		2,685			4,030			4,512			10,613			10,320
Long-term debt		20,155			21,155			27,155			27,155			23,155
Shareholders’ equity		31,438			28,282			25,358			23,413			21,533
Per Share Data
Basic earnings	$	2.95		$	2.63		$	1.59		$	1.67		$	1.44
Cash dividends declared		0.75			0.675			0.58			0.52			0.47
Book value		22.33			20.15			18.10			16.73			15.38
Weighted average common shares outstanding		1,405			1,402			1,399			1,400			1,400
Selected Ratios
Return on average assets		1.10	%		1.01	%		0.65	%		0.73	%		0.70	%
Return on average shareholders’ equity		13.80	%		13.71	%		9.06	%		10.52	%		9.91	%
Average equity to average assets		7.95	%		7.39	%		7.13	%		6.96	%		7.05	%
Allowance for loan losses to total loans at end of period		1.23	%		0.90	%		1.29	%		0.76	%		0.65	%
Dividend payout ratio		25.42	%		25.66	%		36.48	%		31.14	%		32.62	%

64

DIRECTORS

FIRST COMMUNITY FINANCIAL CORPORATION

and

THE FIRST NATIONAL BANK OF MIFFLINTOWN

JOHN P. HENRY, III

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

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

ROGER SHALLENBERGER

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

President of KSM Enterprises

JODY D. GRAYBILL

President and Chief Executive Officer of the Company and the Bank

LOWELL M. SHEARER

Secretary of the Board of Directors of the Company and the

Bank; Self-employed

NANCY S. BRATTON

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

DANIEL B. BROWN

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

SAMUEL G. KINT

Retired businessman

DAVID M. McMILLEN

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

CHARLES C. SANER

Retired Dairy Farmer

DAVID L. SWARTZ

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

and Cumberland Counties

FRANK L. WRIGHT

Attorney-at-Law, Harrisburg, PA

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Officers

FIRST COMMUNITY FINANCIAL CORPORATION

JOHN P. HENRY, III

Chairman

ROGER SHALLENBERGER

Vice Chairman

JODY D. GRAYBILL

President & Chief Executive Officer

LOWELL M. SHEARER

Secretary

RICHARD R. LEITZEL

Treasurer

JENNIFER S. KAUFFMAN

Assistant Secretary

BOBBI J. LEISTER

Assistant Secretary

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OFFICERS

THE FIRST NATIONAL BANK OF MIFFLINTOWN

JODY D. GRAYBILL

President and Chief Executive Officer

K. LEE HOPKINS

Senior Vice President and Chief Lending Officer

KIMBERLY A. BENNER

Vice President and Trust and Investment Services Division Manager

MATTHEW J. FORD

Vice President and Chief Risk Officer

RICHARD R. LEITZEL

Vice President and Chief Financial Officer

TIMOTHY P. STAYER

Vice President, Marketing and Community Banking Services Division Manager

JAMES L. CORDELL

Vice President and Credit Administration Manager

G. LEWIS DAVEY

Vice President, Bloomfield Borough and New Bloomfield Offices and Commercial Loan Officer

SCOTT E. FRITZ

Vice President and Commercial Loan Officer

NANETTE W. STAKE

Vice President, IT Manager and IT Security Officer

FLORENCE E. DRESSLER

Assistant Vice President and Community Office Manager, Fermanagh Office

AUDRA L. HUNTER

Assistant Vice President and Community Office Manager, Newport Office

CHRISTOPHER W. MEALS

Assistant Vice President and Community Office Manager, Mifflintown Office

ROY A. LEISTER, JR.

Assistant Vice President and Community Office Manager, Delaware Office

BRADLEY D. SHERMAN

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

DIANE E. ZEIDERS

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

NANCI A. AUMILLER

Assistant Vice President and Operations Manager/BSA/AML and Security Officer

J. NEAL SHAWVER

Assistant Vice President and Credit Analyst

DIANE M. SYKES

Assistant Vice President and Trust Officer

BILLIE JO DEITER

Community Office Manager, Ickesburg Office

KIM W. MILLS

Community Office Manager, Bloomfield Borough and New Bloomfield Offices

ADAM E. TRUITT

Trust Officer

JENNIFER L. WILSON

Credit Analyst

BOBBI J. LEISTER

Assistant Secretary / Corporate Relations and Marketing Officer

JENNIFER S. KAUFFMAN

Assistant Secretary

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DIRECTORS EMERITI AND ADVISORY BOARDS

DIRECTORS EMERITI

DONALD Q. ADAMS

JOHN M. AUKER

JOSEPH E. BARNES, SR.

DALE BEASTON

WILLIAM A. GILLILAND

ELWOOD S. HENCH

C. ROBERT HOCKENBROCK

RAYMOND T. LONG

JANE B. MARHEFKA

JAMES L. MCCLURE

CLAIR E. MCMILLEN

PHYLLIS S. MOHLER

ROBERT E. SHEAFFER

JOHN A. TETWILER

RICHARD L. WIBLE

ADVISORY BOARDS

TUSCARORA VALLEY AND EAST WATERFORD OFFICES

KEVIN L. LONG

NORMAN F. LOVE

JAMES M. SHEAFFER

BARBARA G. WILSON

FERMANAGH OFFICE

RONALD H. MAST

RICHARD E. RHINE

SAMUEL RITZMAN

ALAN E. VARNER

DELAWARE OFFICE

DENNIS L. BASSLER

MERVIN J. STRAWSER

NEW BLOOMFIELD, SHERMANS DALE AND BLOOMFIELD BOROUGH OFFICES

WILLIAM R. BUNT

DARWIN L. KITNER

JOHN K. MCCLELLAN

FRED E. MORROW

JAMES E. SWENSON

WEST PERRY, ICKESBURG AND LOYSVILLE OFFICES

AMOS S. ESH

CLEE L. MCMILLEN

CHARLES C. NYCE

TERRY K. URICH

NEWPORT OFFICE

PETER E. BRUMMER

GERALD R. GABEL

TERRY J. HELLER

CHARLES C. SMITH

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BANK LOCATIONS

First Community Financial Corporation

and Wholly Owned Subsidiary,

The First National Bank of Mifflintown

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

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

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

ONLINE

www.fnbmifflintown.com

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Stock and Dividend Information

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

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

	Per Share Sales Price				Dividends
Quarter	High		Low		per Share
First, 2011	$	29.75	$	26.91	$	0.180
Second		30.00		29.00		0.185
Third		32.00		29.00		0.190
Fourth		38.00		32.00		0.195
First, 2010	$	29.00	$	20.00	$	0.160
Second		32.00		22.00		0.170
Third		29.24		25.00		0.170
Fourth		28.00		25.56		0.175

The authorized common stock of the Corporation consists of 10,000,000 shares of common stock, par value $5.00 per share, of which 1,407,870 shares were outstanding at December 31, 2011. There were no shares of the Corporation’s common stock (i) that are subject to outstanding options, warrants or securities convertible into common stock; (ii) that the Corporation has agreed to register under the Securities Act for sale by security holders; or (iii) that are or have been proposed to be publicly offered by the Corporation. The Corporation had approximately 727 shareholders of record as of December 31, 2011.

Annual Report on Form 10-K

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

Mr. Richard R. Leitzel

Vice President & Chief Financial Officer

First Community Financial Corporation

P.O. Box 96

Mifflintown, PA 17059

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

Notice of Annual Meeting

The Annual Meeting of Shareholders of the Corporation will be held on Tuesday, April 10, 2012, beginning at 10:00 a.m., at: Cedar Grove Brethren in Christ Church, located near the PA Route 75 and U.S. Route 22/322 interchange in Mifflintown, Pennsylvania. A Notice of the Annual Meeting, Proxy Statement and Proxy are being delivered together with this Annual Report to shareholders entitled to vote at the meeting.

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