**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

# **FORM10-Q/A**

 

**(markone)**

 

| **ý** | **QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                                                                                                                     |
|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |                                                                                                                                                                                                                                                                                                                                       |
|       | **For  the quarterly period ended September 30, 2002**                                                                                                                                                                                                                                                                                     |
|       |                                                                                                                                                                                                                                                                                                                                       |
| **OR**     |
|       |                                                                                                                                                                                                                                                                                                                                       |
| **o**      | **TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                                                                                                                    |
|       |                                                                                                                                                                                                                                                                                                                                       |
|       | **For  the transition period from                            to                         ** |

 

**Commission File Number 0-24024**

 

**FirstCommunity Financial Group, Inc.**

(Exact name ofregistrant as specified in its charter)

 

| **Washington**                                                                |   | **91-1277503**                        |
|-------------------------------------------------------------------------------|--------|---------------------------------------|
| (State or other  jurisdiction  of incorporation or organization)              |   | (IRS Employer  Identification Number) |
|                                                                          |   |                                  |
| **721 College Street SE, P.O. Box  3800, Lacey, WA  98509**              |
| (Address of  principal executive offices)                                     |
|                                                                          |   |                                  |
| Registrant’s  telephone number:   **(360) 459-1100** |

 

### Indicateby check mark whether the registrant (1) has filed all reports required to befiled by sections 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

 

| ý  Yes |   | o  NO |
|------------------|--------|------------|

 

Indicate the number ofshares outstanding in each of the issuer’s classes of common stock, as of thelatest practicable date.

 

| **Title of Class**             |   | **Outstanding at November 7, 2002** |
|--------------------------------|--------|-------------------------------------|
| Common Stock, no  stated value |   | 2,194,468                           |

 

 

----

 

**First Community Financial Group, Inc.**

**Table of Contents**

 

 
| PART 1 - FINANCIAL  INFORMATION |
|---------------------------------|
|                            |
| Item 1                          | Financial Statements |
|                            | Condensed Consolidated Balance Sheets |
|                            | Condensed Consolidated  Statements of Income and Comprehensive Income |
|                            | Condensed  Consolidated Statement of Stockholders’ Equity |
|                            | Condensed Consolidated Statements of Cash  Flows |
|                            | Notes to Condensed  Consolidated Financial Statements |
|                            |   |
| Item 2                          | Management’s Discussion and Analysis of  Financial Condition and Results of Operations |
|                            |   |
| Item 3                          | Quantitative and Qualitative Disclosures about  Market Risk |
|                            |   |
| Item 4                          | Disclosure Controls and Procedures |
|                            |   |
| PART 2 - OTHER INFORMATION      |
|                            |   |
| Item 1                          | Legal Proceedings |
|                            |   |
| Item 2                          | Changes in Securities  and Use of Proceeds |
|                            |   |
| Item 3                          | Defaults Upon Senior  Securities |
|                            |   |
| Item 4                          | Submission of Matters  to Vote of Security Holders |
|                            |   |
| Item 5                          | Other Information |
|                            |   |
| Item 6                          | Exhibits and Reports on Form 8-K |
|                            |   |
| SIGNATURES                      |

 

2

----

 

**Part1 - FINANCIAL INFORMATION**

**Item1 - Financial Statements**

 

**FIRSTCOMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARIES**Condensed Consolidated Balance Sheets(Unaudited)

 

*(Dollars in Thousands)*

 
|                                                                                                                                                                               |   | **September  30  2002** |        | **December  31,  2001** |       |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|-------------|-------------------------|------------|
| **Assets**                                                                                                                                                                         |   |                    |        |                    |       |
| Cash  and due from banks                                                                                                                                                           |   | $                       | 23,311      |                    | $          | 21,383 |   |
| Interest  bearing deposits in banks                                                                                                                                                |   | 72                      |        | 74                      |       |
| Federal  funds sold                                                                                                                                                                |   | 3,000                   |        | 0                       |       |
| Securities  available for sale                                                                                                                                                     |   | 25,557                  |        | 18,104                  |       |
| Securities  held to maturity                                                                                                                                                       |   | 505                     |        | 506                     |       |
| Federal  Home Loan Bank stock                                                                                                                                                      |   | 1,205                   |        | 1,985                   |       |
| Loans  held for sale                                                                                                                                                               |   | 9,234                   |        | 6,196                   |       |
|                                                                                                                                                                               |   |                    |        |                    |       |
| Loans                                                                                                                                                                              |   | 303,079                 |        | 288,701                 |       |
| Allowance  for credit losses                                                                                                                                                       |   | 4,628                   |        | 4,088                   |       |
| **Net Loans**                                                                                                                                                                      |   | **298,451**             | ** **  | **284,613**             | ** ** |
|                                                                                                                                                                               |   |                    | ** **  |                    | ** ** |
| Premises and equipment                                                                                                                                                             |   | 9,999                   |        | 10,382                  |       |
| Foreclosed real estate                                                                                                                                                             |   | 4,789                   |        | 4,387                   |       |
| Accrued interest received                                                                                                                                                          |   | 1,666                   |        | 1,471                   |       |
| Cash value of life insurance                                                                                                                                                       |   | 8,755                   |        | 8,453                   |       |
| Intangible assets                                                                                                                                                                  |   | 6,268                   |        | 6,268                   |       |
| Other assets                                                                                                                                                                       |   | 1,708                   |        | 801                     |       |
|                                                                                                                                                                               |   |                    | ** **  |                    | ** ** |
| **Total assets**                                                                                                                                                                   |   | **$**                   | **394,520** | ** **              | **$**      | **364,623** | ** ** |
|                                                                                                                                                                               |   |                    | ** **  |                    | ** ** |
| **Liabilities**                                                                                                                                                                    |   |                    | ** **  |                    | ** ** |
| Deposits:                                                                                                                                                                          |   |                    | ** **  |                    | ** ** |
| Non-interest bearing                                                                                                                                                               |   | $                       | 59,967      |                    | $          | 55,013 |   |
| Savings and interest bearing demand                                                                                                                                                |   | 129,093                 |        | 123,093                 |       |
| Time deposits                                                                                                                                                                      |   | 133,027                 |        | 135,624                 |       |
| **Total deposits**                                                                                                                                                                 |   | **322,087**             | ** **  | **313,730**             | ** ** |
|                                                                                                                                                                               |   |                    |        |                    |       |
| Federal funds purchased                                                                                                                                                            |   | 3,500                   |        | 1,400                   |       |
| Short term borrowing                                                                                                                                                               |   | 6,917                   |        | 5,655                   |       |
| Long term debt                                                                                                                                                                     |   | 14,403                  |        | 575                     |       |
| Accrued interest payable                                                                                                                                                           |   | 382                     |        | 364                     |       |
| Other liabilities                                                                                                                                                                  |   | 4,652                   |        | 4,104                   |       |
| **Total Liabilities**                                                                                                                                                              |   | **351,941**             | ** **  | **325,828**             | ** ** |
|                                                                                                                                                                               |   |                    | ** **  |                    | ** ** |
| **Stockholders’ Equity**                                                                                                                                                      |   |                    | ** **  |                    | ** ** |
| Common stock, no stated value per share;  10,000,000 shares authorized, 2,192,968 shares outstanding at September 30,  2002, and 2,186,681 shares outstanding at December 31, 2001 |   | 28,353                  |        | 28,596                  |       |
| Retained earnings                                                                                                                                                                  |   | 13,991                  |        | 9,912                   |       |
| Accumulated other comprehensive income                                                                                                                                             |   | 235                     |        | 312                     |       |
| Debt related to KSOP                                                                                                                                                               |   | 0                       |        | (25                     | )          |
| **Total stockholders’ equity**                                                                                                                                                |   | **42,579**              | ** **  | **38,795**              | ** ** |
|                                                                                                                                                                               |   |                    | ** **  |                    | ** ** |
| **Total liabilities and stockholders’ equity**                                                                                                                                |   | **$**                   | **394,520** | ** **              | **$**      | **364,623** | ** ** |

 

*See notes to condensed consolidated financial statements*

 

3

----

 

**FIRST COMMUNITY FINANCIAL GROUP, INC.AND SUBSIDIARIES**

Condensed Consolidated Statements of Income and Comprehensive Income(Unaudited)

 

*(Dollars in thousands, except pershare amounts)*

 
|                                                                         |   | **Three  months ended  September 30,** |       | **Nine  months ended  September 30,** |       |
|------------------------------------------------------------------------------|--------|----------------------------------------|------------|---------------------------------------|------------|
|                                                                         |   | **2002**                               |       | **2001**                              |       | **2002** |   | **2001** |   |
| **Interest  income**                                                         |   |                                   |       |                                  |       |   |   |   |   |
| Loans                                                                        |   | $                                      | 6,987      |                                  | 7,609      |   | $ | 20,305 |   | 21,533 |   |
| Federal  funds sold and deposits in banks                                    |   | 17                                     |       | 6                                     |       | 21 |   | 104 |   |
| Investments                                                                  |   | 323                                    |       | 353                                   |       | 932 |   | 1,161 |   |
| **Total interest income**                                                    |   | **7,327**                              | ** ** | **7,968**                             | ** ** | **21,258** | ** ** | **22,798** | ** ** |
| **Interest  Expense**                                                        |   |                                   | ** ** |                                  | ** ** |   | ** ** |   | ** ** |
| Deposits                                                                     |   | 1,403                                  |       | 2,500                                 |       | 4,431 |   | 7,925 |   |
| Other                                                                        |   | 229                                    |       | 80                                    |       | 381 |   | 244 |   |
| **Total interest expense**                                                   |   | **1,632**                              | ** ** | **2,580**                             | ** ** | **4,812** | ** ** | **8,169** | ** ** |
| **Net  interest income**                                                     |   | **5,695**                              | ** ** | **5,388**                             | ** ** | **16,446** | ** ** | **14,629** | ** ** |
| **Provision  for credit losses**                                             |   | **623**                                | ** ** | **513**                               | ** ** | **1,608** | ** ** | **958** | ** ** |
| **Net  interest income after provision For credit losses**                   |   | **5,072**                              | ** ** | **4,875**                             | ** ** | **14,838** | ** ** | **13,671** | ** ** |
| **Non-interest  income**                                                     |   |                                   | ** ** |                                  | ** ** |   | ** ** |   | ** ** |
| Service  charges on deposit accounts                                         |   | 768                                    |       | 709                                   |       | 2,240 |   | 1,649 |   |
| Origination  fees on mortgage loans sold                                     |   | 662                                    |       | 497                                   |       | 1,715 |   | 1,398 |   |
| Other  income                                                                |   | 610                                    |       | 395                                   |       | 1,729 |   | 1,341 |   |
| **Total non-interest income**                                                |   | **2,040**                              | ** ** | **1,601**                             | ** ** | **5,684** | ** ** | **4,388** | ** ** |
| **Non-interest  expense**                                                    |   |                                   | ** ** |                                  | ** ** |   | ** ** |   | ** ** |
| Salaries  and employee benefits                                              |   | 2,451                                  |       | 2,433                                 |       | 7,086 |   | 7,000 |   |
| Occupancy  and equipment                                                     |   | 620                                    |       | 618                                   |       | 1,847 |   | 1,824 |   |
| Other  expense                                                               |   | 1,543                                  |       | 1,610                                 |       | 4,631 |   | 4,432 |   |
| **Total non-interest expense**                                               |   | **4,614**                              | ** ** | **4,661**                             | ** ** | **13,564** | ** ** | **13,256** | ** ** |
| **Operating  income before income taxes**                                    |   | **2,498**                              | ** ** | **1,815**                             | ** ** | **6,958** | ** ** | **4,803** | ** ** |
| Income  Taxes                                                                |   | 816                                    |       | 547                                   |       | 2,220 |   | 1,472 |   |
|                                                                         |   |                                   |       |                                  |       |   |   |   |   |
| **Net  income**                                                              |   | **$**                                  | **1,682**  | ** **                            | **1,268**  | ** ** | **$** | **4,738** | ** ** | **3,331** | ** ** |
| **Other  comprehensive income, net of tax**                                  |   |                                   | ** ** |                                  | ** ** |   | ** ** |   | ** ** |
| Unrealized  holding gains (losses) on securities                             |   | 275                                    |       | 114                                   |       | (77 | ) | 553 |   |
| Available  for sale, arising during the period                               |   |                                   |       |                                  |       |   |   |   |   |
|                                                                         |   |                                   |       |                                  |       |   |   |   |   |
| **Comprehensive income**                                                     |   | **$**                                  | **1,957**  | ** **                            | **1,382**  | ** ** | **$** | **4,661** | ** ** | **3,884** | ** ** |
|                                                                         |   |                                   |       |                                  |       |   |   |   |   |
| **Earnings per share data**                                                  |   |                                   | ** ** |                                  | ** ** |   | ** ** |   | ** ** |
| **Basic  earnings per share**                                                |   | **$**                                  | **0.77**   | ** **                            | **0.58**   | ** ** | **$** | **2.16** | ** ** | **1.53** | ** ** |
| **Diluted  earnings per share**                                              |   | **$**                                  | **0.75**   | ** **                            | **0.57**   | ** ** | **$** | **2.13** | ** ** | **1.50** | ** ** |
|                                                                         |   |                                   |       |                                  |       |   |   |   |   |
| Weighted  average number of common shares                                    |   | 2,190,951                              |       | 2,181,459                             |       | 2,188,605 |   | 2,178,716 |   |
| Weighted  average number of common shares - including dilutive stock options |   | 2,245,165                              |       | 2,227,194                             |       | 2,222,813 |   | 2,218,212 |   |
| Return  on average assets                                                    |   | 1.73                                   | %          | 1.43                                  | %          | 1.67 | % | 1.34 | % |
|                                                                         |   |                                   |       |                                  |       |   |   |   |   |
| Dividends  per share                                                         |   | $                                      | 0.10       |                                  | 0.10       |   | $ | 0.30 |   | 0.30 |   |

 

*See notes to condensed consolidated financial statements*

 

4

----

 

**FIRST COMMUNITY FINANCIAL GROUP, INC.AND SUBSIDIARIES**

Condensed Consolidated Statements of Stockholders’ Equity (Unaudited)

Nine months EndedSeptember 30, 2001 and 2002

 

(Dollars in thousands)

 
|                                  |   | **Common  Stock** |       | **Retained  Earnings** |       | **Accumulated  Other  Comprehensive  Income (Loss)** |       | **Debt  Related  To KSOP** |       | **Total**  |       |
|---------------------------------------|--------|-------------------|------------|------------------------|------------|------------------------------------------------------|------------|----------------------------|------------|------------|------------|
|                                  |   |              |       |                   |       |                                                 |       |                       |       |       |       |
| Balance,  December 31, 2000           |   | $                 | 28,559     |                   | $          | 6,349                                                |       | $                          | (332       | )          | $          | (203 | ) | $ | 34,373 |   |
|                                  |   |              |       |                   |       |                                                 |       |                       |       |       |       |
| Net  Income                           |   | **—**        |       | 3,331                  |       | **—**                                           | ** ** | **—**                 |       | 3,331      |       |
|                                  |   |              |       |                   |       |                                                 |       |                       |       |       |       |
| Stock  options exercised              |   | 27                |       | —                 |       | —                                               |       | —                     |       | 27         |       |
|                                  |   |              |       |                   |       |                                                 |       |                       |       |       |       |
| Cash  dividends ($0.30 per share)     |   | **—**        |       | (656                   | )          | —                                               |       | —                     |       | (656       | )          |
|                                  |   |              |       |                   |       |                                                 |       |                       |       |       |       |
| Other  comprehensive income           |   | —            |       | **—**             |       | 553                                                  |       | **—**                 |       | 553        |       |
|                                  |   |              |       |                   |       |                                                 |       |                       |       |       |       |
| Net  decrease in debt related To KSOP |   | —            |       | **—**             |       | —                                               |       | 133                        |       | 133        |       |
|                                  |   |              |       |                   |       |                                                 |       |                       |       |       |       |
| **Balance,  September 30, 2001**      |   | **$**             | **28,586** | ** **             | **$**      | **9,024**                                            | ** ** | **$**                      | **221**    | ** ** | **$**      | **(70** | **)** | **$** | **37,761** | ** ** |
|                                  |   |              | ** ** |                   | ** ** |                                                 | ** ** |                       | ** ** |       | ** ** |
| **Balance,  December 31, 2001**       |   | **$**             | **28,596** | ** **             | **$**      | **9,912**                                            | ** ** | **$**                      | **312**    | ** ** | **$**      | **(25** | **)** | **$** | **38,795** | ** ** |
|                                  |   |              |       |                   |       |                                                 |       |                       |       |       |       |
| Net  income                           |   | —            |       | 4,738                  |       | —                                               |       | —                     |       | 4,738      |       |
|                                  |   |              |       |                   |       |                                                 |       |                       |       |       |       |
| Stock  options exercised              |   | 707               |       | —                 |       | —                                               |       | —                     |       | 707        |       |
|                                  |   |              |       |                   |       |                                                 |       |                       |       |       |       |
| Cash  dividends ($0.30 per share)     |   | —            |       | (659                   | )          | —                                               |       | —                     |       | (659       | )          |
|                                  |   |              |       |                   |       |                                                 |       |                       |       |       |       |
| Stock  repurchased                    |   | (950              | )          | —                 |       | —                                               |       | —                     |       | (950       | )          |
|                                  |   |              |       |                   |       |                                                 |       |                       |       |       |       |
| Other  comprehensive loss             |   | —            |       | —                 |       | (77                                                  | )          | —                     |       | (77        | )          |
|                                  |   |              |       |                   |       |                                                 |       |                       |       |       |       |
| Net  decrease in debt related To KSOP |   | —            |       | —                 |       | —                                               |       | 25                         |       | 25         |       |
|                                  |   |              |       |                   |       |                                                 |       |                       |       |       |       |
| **Balance,  September 30, 2002**      |   | **$**             | **28,353** | ** **             | **$**      | **13,991**                                           | ** ** | **$**                      | **235**    | ** ** | **$**      | **0** | ** ** | **$** | **42,579** | ** ** |

 

*See notes to condensed consolidated financial statements*

 

5

----

 

**FIRST COMMUNITY FINANCIAL GROUP, INC.AND SUBSIDIARIES**

Condensed Consolidated Statements of Cash Flows (Unaudited)

 

(Dollars in thousands)

 
|                                                                                          |   | **Nine  months Ended  September 30,** |       |
|-----------------------------------------------------------------------------------------------|--------|---------------------------------------|------------|
|                                                                                          |   | **2002**                              |       | **2001** |   |
| **Cash Flows from Operating Activities**                                                      |   |                                  |       |   |   |
| Net  Income                                                                                   |   | $                                     | 4,738      |   | $ | 3,331 |   |
| Adjustments  to reconcile net income to net cash provided by (used in) Operating  activities: |   |                                  |       |   |   |
| Provision  for credit losses                                                                  |   | 1,608                                 |       | 958 |   |
| Depreciation  and amortization                                                                |   | 861                                   |       | 829 |   |
| Amortization  of intangible assets                                                            |   | 0                                     |       | 306 |   |
| Increase  in cash value of life insurance                                                     |   | (302                                  | )          | (5,147 | ) |
| Other  - net                                                                                  |   | (1,267                                | )          | 89 |   |
| Originations  of loans held for sale                                                          |   | (66,979                               | )          | (64,242 | ) |
| Proceeds  from sales of loans held for sale                                                   |   | 63,941                                |       | 56,678 |   |
| **Net  cash provided by operating activities**                                                |   | **2,501**                             | ** ** | **(7,198** | **)** |
|                                                                                          |   |                                  |       |   |   |
| **Cash  Flows from Investing Activities**                                                     |   |                                  | ** ** |   | ** ** |
| Net  decrease in interest bearing deposits in banks                                           |   | 2                                     |       | 24 |   |
| Net  increase in Federal funds sold                                                           |   | (3,000                                | )          | 0 |   |
| Proceeds  from maturities of available-for-sale securities                                    |   | 5,658                                 |       | 5,845 |   |
| Purchase  of securities available for sale                                                    |   | (13,149                               | )          | 0 |   |
| Proceeds  from sale of Federal Home Loan Bank stock                                           |   | 870                                   |       | 0 |   |
| Net  increase in loans                                                                        |   | (15,446                               | )          | (25,290 | ) |
| Proceeds  from sale of foreclosed real estate                                                 |   | 325                                   |       | 95 |   |
| Additions  to premises and equipment                                                          |   | (478                                  | )          | (1,189 | ) |
| **Net  cash used by investing activities**                                                    |   | **(25,218**                           | **)**      | **(20,515** | **)** |
|                                                                                          |   |                                  |       |   |   |
| **Cash  Flows from Financing Activities**                                                     |   |                                  | ** ** |   | ** ** |
| Net  increase in deposits                                                                     |   | 8,357                                 |       | 36,202 |   |
| Net  increase (decrease) in short-term borrowings                                             |   | 3,362                                 |       | 3,720 |   |
| Sale  of common stock                                                                         |   | 707                                   |       | 27 |   |
| Repurchase  of common stock                                                                   |   | (950                                  | )          | 0 |   |
| Increase  in long term borrowings                                                             |   | 14,403                                |       | 0 |   |
| Repayment  of long-term borrowings                                                            |   | (575                                  | )          | (683 | ) |
| Payment  of dividends                                                                         |   | (659                                  | )          | (656 | ) |
| **Net  cash provided by financing activities**                                                |   | **24,645**                            | ** ** | **38,610** | ** ** |
|                                                                                          |   |                                  |       |   |   |
| **Net  change in cash and due from banks**                                                    |   | **1,928**                             | ** ** | **10,897** | ** ** |
|                                                                                          |   |                                  |       |   |   |
| **Cash  and Due from Banks:**                                                                 |   |                                  | ** ** |   | ** ** |
| Beginning  of period                                                                          |   | 21,383                                |       | 12,640 |   |
|                                                                                          |   |                                  |       |   |   |
| **End of  period**                                                                            |   | **$**                                 | **23,311** | ** ** | **$** | **23,537** | ** ** |
|                                                                                          |   |                                  |       |   |   |
| **Supplemental  Disclosures of Cash Flow Information:**                                       |   |                                  | ** ** |   | ** ** |
| **Cash  payments for:**                                                                       |   |                                  | ** ** |   | ** ** |
| Interest                                                                                      |   | $                                     | 4,794      |   | $ | 8,256 |   |
| Taxes                                                                                         |   | 2,215                                 |       | 1,095 |   |
|                                                                                          |   |                                  |       |   |   |
| **Supplemental  Disclosures of Non-Cash Investing Activities:**                               |   |                                  | ** ** |   | ** ** |
| Other  real estate acquired in settlement of loans                                            |   | $                                     | 727        |   | $ | 392 |   |
| Fair  value adjustment of securities available for sale, net                                  |   | (77                                   | )          | 553 |   |
| Decrease  in guarantee of KSOP obligation                                                     |   | (25                                   | )          | (133 | ) |

 

*See notes to condensed consolidated financial statements*

 

6

----

 

**FIRST COMMUNITY FINANCIAL GROUP, INC.AND SUBSIDIARIES**

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

**1.****                   Basisof Presentation**

 

The accompanyingunaudited consolidated financial statements have been prepared in accordancewith accounting principles generally accepted in the United States of Americafor interim financial information and with instructions to Form 10-Q and Rule10-01 of Regulation S-X.  Accordingly,they do not include all of the information and footnotes required by accountingprinciples generally accepted in the United States of America for completefinancial statements.  In the opinion ofmanagement, adjustments considered necessary for a fair presentation(consisting of normally recurring accruals) have been included.  The interim condensed consolidated financialstatements should be read in conjunction with the December 31, 2001consolidated financial statements, including notes thereto, included in theCompany’s 2001 Annual Report to Shareholders. Operating results for the nine months ended September 30, 2002 are notnecessarily indicative of the results anticipated for the year ending December31, 2002.

 

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States of America requires management to make estimatesand assumptions that affect the report amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereporting period.  Actual results coulddiffer from those estimates.

 

**2.****                   Basicand Diluted Earnings Per Share**

 

Basic and dilutedearnings per share are calculated by dividing net income by the weightedaverage number of common shares outstanding during the periods presented.  Diluted earnings per share assumes that alldilutive stock options outstanding are issued such that their dilutive effectis maximized.

 
|                                                         |   | **Three  Months Ended  September 30,** |      | **Nine  Months Ended  September 30,** |   |
|--------------------------------------------------------------|--------|----------------------------------------|-----------|---------------------------------------|--------|
|                                                         |   | **2002**                               |      | **2001**                              |   | **2002** |   | **2001** |   |
|                                                         |   |                                   |      |                                  |   |   |   |   |   |
| Basic  EPS computation                                       |   |                                   |      |                                  |   |   |   |   |   |
| Numerator  - Net Income                                      |   | $                                      | 1,682,000 |                                  | $      | 1,268,000 |   | $ | 4,738,000 |   | $ | 3,331,000 |   |
|                                                         |   |                                   |      |                                  |   |   |   |   |   |
| Denominator  - Weighted Average common shares outstanding    |   | 2,190,951                              |      | 2,181,459                             |   | 2,188,605 |   | 2,178,716 |   |
|                                                         |   |                                   |      |                                  |   |   |   |   |   |
| Basic  EPS                                                   |   | $                                      | .77       |                                  | $      | .58 |   | $ | 2.16 |   | $ | 1.53 |   |
|                                                         |   |                                   |      |                                  |   |   |   |   |   |
| Diluted  EPS computation                                     |   |                                   |      |                                  |   |   |   |   |   |
| Numerator  - Net Income                                      |   | $                                      | 1,682,000 |                                  | $      | 1,268,000 |   | $ | 4,738,000 |   | $ | 3,331,000 |   |
|                                                         |   |                                   |      |                                  |   |   |   |   |   |
| Denominator  - Weighted Average common shares outstanding    |   | 2,190,951                              |      | 2,181,459                             |   | 2,188,605 |   | 2,178,716 |   |
|                                                         |   |                                   |      |                                  |   |   |   |   |   |
| Effect  of dilutive stock options                            |   | 54,214                                 |      | 45,735                                |   | 34,208 |   | 39,496 |   |
|                                                         |   |                                   |      |                                  |   |   |   |   |   |
| Weighted  average common shares and common stock equivalents |   | 2,245,165                              |      | 2,227,194                             |   | 2,222,813 |   | 2,218,212 |   |
|                                                         |   |                                   |      |                                  |   |   |   |   |   |
| Diluted  EPS                                                 |   | $                                      | .75       |                                  | $      | .57 |   | $ | 2.13 |   | $ | 1.50 |   |

 

7

----

 

**3.****                   RecentAccounting Pronouncements**

 

The Financial AccountingStandards Board issued Financial Accounting Standards No. 141, BusinessCombinations, and 142, Goodwill and Other Intangible Assets, in 2001, with aneffective date of January 1, 2002.  SFASNo. 141 requires that all business combinations entered into after September30, 2001 be accounted for under the purchase method.  SFAS No. 142 addresses how goodwill and other intangible assetsshould be accounted for after they have been initially recorded in thefinancial statements.  Goodwill arisingfrom business combinations prior to the effective date of this standard will nolonger be amortized, starting in 2002, but will be subject to annual tests forimpairment.  In accordance with theprovisions of SFAS No. 142, at June 30, 2002, the Company completed itstransitional assessment of goodwill impairment and has determined that noadjustment for goodwill impairment is required.  Other identifiable intangible assets, and certain unidentifiableintangible assets arising from certain acquisitions, will continue to beamortized using the same lives and methods. The Company has $4,159,000 of goodwill on which amortization has ceasedeffective January 1, 2002 which resulted in a reduction of amortization expenseof $155,000 in the nine months ended September 30, 2002.  The remaining intangible assets of$1,959,000 will continue to be amortized.

 

In September 2001, theFASB also issued SFAS No. 143, Accounting for Asset RetirementObligations.  This statement addressesfinancial accounting and reporting obligations associated with the retirementof tangible long-lived assets and the associated annual retirement costs.  This statement is effective for all fiscalyears beginning after September 15, 2002. The Company does not anticipate that the adoption of SFAS No. 143 willhave a material effect on its financial position or results of operations.  In August 2001 the FASB issued SFAS No. 144,Accounting for the Impairment or Disposal of Long-Lived Assets, which becameeffective January 1, 2002.  Thestatement addresses financial accounting and reporting for the impairment ordisposal of long-lived assets.  Adoptionof this standard has not had an impact on the Company’s financial statements.

 

Statement of FinancialAccounting Standard (SFAS) No. 147, Acquisitions of Certain FinancialInstitutions - an amendment of FASB Statements no. 72 and 144 and FASBInterpretation No. 9.  The provisions ofthis Statement that relate to the application of the purchase method ofaccounting, apply to all acquisitions of financial institutions, excepttransactions between two or more mutual enterprises.  This Statement removes acquisitions of financial institutionsfrom the scope of both Statement 72 and Interpretation 9 and require that thosetransactions be accounted for in accordance with FASB Statements No. 141,Business Combinations, and No. 142, Goodwill and Other Intangible Assets.  In addition, this Statement amends FASBStatement No. 144, Accounting for the Impairment or Disposal of Long-LivedAssets, to include in its scope long-term customer-relationship intangibleassets of financial institutions such as depositor- and borrower-relationshipintangible assets and credit cardholder intangible assets.  This statement is effective for acquisitionsfor which the date of the transaction is on or after October 1, 2002.  The Company does not expect the Statementwill result in a material impact on its financial position or results ofoperations.

 

**4.****                   SubsequentEvents**

 

**Acquisition of Harbor Bank, N.A.**

 

On October 1, 2002 theCompany completed a previously announced acquisition of Harbor Bank, NationalAssociation (“Harbor Bank”) pursuant to an Agreement and Plan of Merger, datedAugust 5, 2002, under the terms of which Harbor Bank merged with and into FirstCommunity Bank of Washington, a Washington state bank and a wholly ownedsubsidiary of the Company.  Harbor Bankshareholders received $10.75 in cash for each share of Harbor Bank common stockoutstanding as of the effective date of the merger.  The total estimated value of the acquisition is approximately $7million.  The acquisition was financedout of existing capital, including the proceeds of an offering of trustpreferred securities completed in July 2002. The acquisition will be accounted for as a purchase and, accordingly,operations of Harbor Bank will be included in the Company’s consolidatedstatements only subsequent to October 1, 2002.

 

8

----

 

**Item2****                                                              Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

 

This discussionand information in the accompanying financial statements contains certainforward-looking statements, which are made pursuant to the safe harborprovisions of the Private Securities Litigation Reform Act of 1995.  Such statements are subject to risks anduncertainties that could cause actual results to differ materially from thosestated.  These risks and uncertaintiesinclude the Company’s ability to maintain or expand its market share and netinterest margins, or to implement its marketing and growth strategies.  Further, actual results may be affected bythe Company’s ability to compete on price and other factors with otherfinancial institutions; customer acceptance of new products and services; andgeneral trends in the banking and regulatory environment, as they related tothe Company’s cost of funds and return on assets.  In addition there are risks inherent in the banking industryrelating to the collectability of loans and changes in interest rates.  The reader is advised that this list ofrisks is not exhaustive and should not be construed as any prediction by theCompany as to which risks would actually cause actual results to differmaterially from those indicated by the forward-looking statements.  Readers are cautioned not to place undue relianceon these forward-looking statements.

 

**Financial Condition**

 

General

The Company’sconsolidated total assets at September 30, 2002 of $395,520,000 represents an8.5% increase over December 31, 2001 assets of $364,623,000.  The growth in assets is reflected inincreases of $13,838,000 in net portfolio loans, $3,038,000 in loans held forsale, $7,453 in securities available for sale and $3,000 in federal funds sold.

 

Loans

The composition ofthe loan portfolio at September 30, 2002 and December 31, 2001 follows (dollarsin thousands):

 
|         |   | **September  30,  2002** |        | **December  31,  2001** |   |
|--------------|--------|--------------------------|-------------|-------------------------|--------|
|         |   |                     |        |                    |   |
| Commercial   |   | $                        | 51,163      |                    | $      | 40,870 |   |
|         |   |                     |        |                    |   |
| Real  Estate |   |                     |        |                    |   |
|         |   |                     |        |                    |   |
| Mortgage     |   | 183,126                  |        | 185,012                 |   |
|         |   |                     |        |                    |   |
| Construction |   | 57,113                   |        | 50,798                  |   |
|         |   |                     |        |                    |   |
| Consumer     |   | 4,103                    |        | 4,732                   |   |
|         |   |                     |        |                    |   |
| Small  Loans |   | 7,574                    |        | 7,289                   |   |
|         |   |                     |        |                    |   |
|         |   | **$**                    | **303,079** |                    | **$**  | **288,701** | ** ** |

 

9

----

 

The total ofnon-performing loans (non-accrual and loans over 90 days past due stillaccruing interest) and other non-performing assets has increased since December31, 2001, as shown in the following table of non-performing assets (dollars inthousands):

 
|                                     |   | **September  30  2002** |      | **December  31  2001** |   |
|------------------------------------------|--------|-------------------------|-----------|------------------------|--------|
|                                     |   |                    |      |                   |   |
| Non-accrual  loans                       |   | $                       | 2,671     |                   | $      | 1,830 |   |
| Accruing  loans past due 90 days or more |   | 0                       |      | 284                    |   |
| Foreclosed  real estate                  |   | 4,789                   |      | 4,387                  |   |
| Other  assets                            |   | 24                      |      | 7                      |   |
|                                     |   |                    |      |                   |   |
|                                     |   | **$**                   | **7,484** |                   | **$**  | **6,508** | ** ** |

 

Non-accrual loansincreased $841,000 during the first nine months of 2002.  There are no accruing loans past due 90 daysor more as of September 30, 2002, a reduction of $284,000 since prioryear-end.  Loans in this category mustbe well secured and in the process of collection for the accrual of interest tocontinue.  These loans are monitored andmay be reclassified as non-accrual as conditions warrant.  Foreclosed real estate has increased by$402,000 from prior year end.   Thepercentage of non-performing loans to total loans increased to 0.88% from 0.73%at December 31, 2001.

 

 

Allowance for CreditLosses

The allowance for creditlosses reflects management’s current estimate of the amount required to absorblosses on existing loans.  Determinationof the appropriate level of the allowance is based on an analysis of variousfactors including: historical loss experience based on volumes and types ofloans; volumes and trends in delinquencies and non-accrual loans; trends inportfolio volume; results of internal and independent external credit reviews;and economic conditions.  All loans inthe portfolio are assigned a grade indicating credit quality by the originatingloan officer at the time of loan origination. These grades are reviewed at regular intervals and, if performanceconcerns arise on an individual loan, the grade is lowered to the appropriatelevel.  Management reviews the compositechanges in loan grades within the portfolio in its assessment of the adequacyof the allowance.  If a loan becomesimpaired, the Company’s loss exposure on that loan is measured based onexpected cash flows or collateral values, and if necessary, a portion of theallowance for credit losses is allocated to that loan.  After reviewing the composition of the loanportfolio at September 30, 2002, the levels of classified loans, lossesexperienced during the period, and the changes in the economy, management hasdetermined the allowance for credit losses to be adequate to cover the lossexposure in the loan portfolio at that date. The analysis of the adequacy of the allowance is subject to quarterlyreview by the Board of Directors.

 

The allowance for creditlosses increased $540,000 in the first nine months of 2002.  The ratio of allowance for credit losses tototal loans increased during the first nine months of 2002 to 1.53% from 1.42%at December 31, 2001.  The dollar valuechange in the allowance consisted of $1,608,000 of provision less $1,068,000 innet charge-offs of loans.  Charge-offswere concentrated in the Company’s small-loan portfolio.  Management increased the allowance forcredit losses during the nine months ended September 30, 2002 in recognition ofthe increase in non-performing loans as shown in the table above, the increasein loans internally classified in the Bank’s loan classification system, andthe continued softness of the economy in the Bank’s primary market area.  The allowance at September 30, 2002 isslightly higher than the mid-point of loss exposure identified in the Bank’sloan loss adequacy analysis model.

 

Investment Portfolio

Investment securitiesincreased $7,452,000, or 40.0% during the first three quarters of 2002 to atotal of $26,062,000.  Additional securitieswere purchased during the third quarter as a source of collateral for a newsweep product and repurchase program introduced by the Company during the thirdquarter.  This program requires that allfunds swept into overnight repurchases be fully collateralized by qualifiedsecurities.  No sales were made andreductions to the balance were the result of callable securities being calledand principal payments received on asset-backed investments.

 

10

----

 

Deposits and Borrowings

Total deposits increased$8,357,000, or 2.7% in the nine months ended September 30, 2002 to$322,087,000.  The mix of depositsshifted toward transaction accounts during the first three quarters, withincreases shown in savings and interest-bearing deposits as well asnon-interest bearing deposits.  Timedeposits decreased slightly.  Short-termborrowings have also been used as a funding source due to their relatively lowcost as compared to time deposits. Federal funds purchased and short-term borrowings increased during thefirst three quarters by $3,362,000 to $10,417,000 due to their favorable costand flexibility in managing funding. Long term debt increased $13,403,000 from the trust preferred issuanceand decreased $550,000 on the final principal payment on a 5 year note.

 

Liquidity

Liquidity managementinvolves the ability to meet cash flow requirements of customers who may beeither depositors wanting to withdraw funds or borrowers needing assurance thatsufficient funds will be available to meet their credit needs.  Liquidity is generated from both internaland external sources.  Internal sourcesare those assets that can be converted to cash with little or no risk ofloss.  These include overnightinvestments in interest bearing deposits in banks and federal funds sold andinvestment securities, particularly those of shorter maturity, and are theprincipal source of asset liquidity.  AtSeptember 30, 2002, cash, deposits in banks, federal funds sold and securitiesavailable for sale totaled $51,940,000. External sources refer to the ability to attract new liabilities andcapital.  They include increasingsavings and demand deposits, federal funds purchased, borrowings and theissuance of capital and debt securities. At September 30, 2002, borrowing lines of credit totaled$47,437,000.  These credit facilitiesare being used regularly as a source of funds. At September 30, 2002,$3,500,000 was borrowed against these lines of credit in the form of federalfunds purchased and term advances.

 

Management believes theCompany’s liquidity position at September 30, 2002, was adequate to meet itsshort term funding requirements.

 

Capital

Consolidated capital ofFCFG increased $3,784,000 during the first nine months of 2002.  The increase comes primarily from netincome, which increased capital by $4,738,000. Capital also increased $707,000 from the exercising of stock options and$25,000 for the elimination of the debt related to the KSOP plan.  Stock repurchases in the amount of $950,000,cash dividends paid of $659,000 and an after-tax decrease in the valuation ofthe securities portfolio of $77,000 were reductions to the capital total.

 

There are regulatoryconstraints placed upon capital adequacy, and it is necessary to maintain anappropriate ratio between capital and assets. Regulations require banks and holding companies to maintain a minimumleverage ratio (primary capital to total assets ratio).  For the most highly rated holding companiesthis ratio must be at least 3%, and for others it must be 4 to 5%.  At September 30, 2002, the Company’sleverage ratio was 9.42%, compared to 8.91% at year-end 2001.  In addition, banks and holding companies arerequired to meet minimum risk-based capital guidelines under which riskpercentages are assigned to various categories of assets and off-balance-sheetitems to calculate a risk-adjusted capital ratio.  Tier I capital generally consists of common stockholders’ equity,less goodwill, while total capital includes the allowance for possible creditlosses, subject to 1.25% limitation of risk-adjusted assets.  The rules require Tier I capital of 4% ofrisk-adjusted assets and total capital of 8%. At September 30, 2002, the Tier I capital ratio was 9.67%, and totalcapital was 10.91%.  At December 31,2001 the Tier I capital ratio was 9.34% and the total capital ratio was 10.52%.

 

**Issuance of Trust Preferred Securities**

 

On July 11 2002, theCompany completed an offering of trust preferred securities and received netproceeds of approximately $12,600,000. A significant portion of the trust preferred proceeds were used inOctober 2002 to fund the acquisition of Harbor Bank, N.A., which closed October1, 2002.  The remaining balance wasadded to the capital of First Community Bank. Trust preferred securities consist of the issuance of subordinated debtsecurities to a wholly owned subsidiary business trust, which then issuespreferred stock to investors.  Theinterest payments on the debt securities are approximately equal to thedividend payments on the preferred stock of the trust.  The Company will be able to recognize adeduction of the interest cost for income tax purposes, while the net proceedswill qualify as Tier 1 capital, up to 25% of conventional Tier 1 capital.

 

11

----

 

**Results of Operations**

 

General

Net income for the ninemonths ended September 30, 2002 was $4,738,000, compared to $3,331,000 for thesame period in 2001.  This represents a42% increase over the prior year.   Netincome for the three months ended September 30, 2002 was $1,682,000, comparedto $1,268,000 for the three months ended September 30, 2001.  This represents a 33% increase in net incomefor the period.

 

Net interest incomeincreased $1,817,000, an increase of 12% for the nine months ended September30, 2002 over the same period for 2001. Net interest income increased $307,000, or 6%, for the three monthsended September 30, 2002.  The increasein the Company’s net interest income is primarily the result of the reduction ininterest rates, and corresponding reduction in cost of funds.  The Company’s small-loan product also had animpact on the growth in net interest income.   This product’s contribution to net interest income grew to $3,561,000 inthe first nine months of 2002 from $2,711,000 in the first nine months of 2001,an $850,000 increase.

 

Interest income for thenine months ended September 30, 2002 decreased $1,540,000, or 7%, from the sameperiod of the prior year.   Increasedvolume of earning assets provided an additional $2,541,000 of interest income,which was more than offset by the $4,081,000 reduction in interest income dueto the reduced earnings rate of these assets.  Average earning assets for the first nine months of 2002 were$20,879,000, or 7% higher than in the same period of 2001.  The average rate earned on assets decreased119 basis points from 10.13% in the first nine months of 2001 to 8.84% for thesame period of 2002. The percentage of average loans to total average earningassets increased over the prior year and represents 92.6% of total averageearning assets, up from 90.5% in 2001. Interest income for the three months ended September 30, 2002 was$641,000 lower than the same period in the previous year.

 

Total interest expensefor the nine months ended September 30, 2002 decreased $3,357,000, or 41%, fromthe comparable period of the prior year. This reduction is in spite of the volume of interest bearing liabilitiesincreasing by 7%.  The decrease in theinterest rates paid on deposits and borrowings, which declined 193 basispoints, from 4.28% in the first nine months of 2001 to 2.35% in the first ninemonths of 2002, produced a reduction in interest expense of $3,680,000.  Of this amount, $323,000 was offset by anincrease in the volume of these liabilities, which rose from an average of$255,036,000 in 2001 to $273,590,000 in 2002. Total interest expense for the three months endedSeptember 30, 2002 was $948,000 lower than the third quarter of 2001.

 

Net interest margin,defined as net interest income as a percentage of average earning assets,increased by 34 basis points to 6.84% from 6.50% in the first nine months of2002 compared to the same period in 2001.

 

12

----

 

The yield and cost of fundsfor earning assets and interest bearing liabilities were as follows as of andfor the nine months ended September 30 (dollars in thousands):

 
|                                                           |   | **Average  Balance** |    | **2002  Interest  Income  (Expense)** |   | **Average  Rates** |   | **Average  Balance** |   | **2001  Interest  Income  (Expense)** |    | **Average  Rates** |   |
|----------------------------------------------------------------|--------|----------------------|---------|---------------------------------------|--------|--------------------|--------|----------------------|--------|---------------------------------------|---------|--------------------|--------|
| Earning  Assets:                                               |   |                 |    |                                  |   |               |   |                 |   |                                  |    |               |   |
| Loans  (Interest and Fees)                                     |   | $                    | 298,027 |                                  | $      | 20,305             |   | 9.11                 | %      | $                                     | 272,330 |               | $      | 21,533 |   | 10.57 | % |
| Federal  funds sold                                            |   | 1,513                |    | 19                                    |   | 1.68               | %      | 2,661                |   | 104                                   |    | 5.23               | %      |
| Investment  securities                                         |   | 22,140               |    | 934                                   |   | 5.64               | %      | 25,810               |   | 1,161                                 |    | 6.01               | %      |
|                                                           |   |                 |    |                                  |   |               |   |                 |   |                                  |    |               |   |
| Total  earning assets and interest income                      |   | $                    | 321,680 |                                  | $      | 21,258             |   | 8.84                 | %      | $                                     | 300,801 |               | $      | 22,798 |   | 10.13 | % |
|                                                           |   |                 |    |                                  |   |               |   |                 |   |                                  |    |               |   |
| Interest  bearing liabilities:                                 |   |                 |    |                                  |   |               |   |                 |   |                                  |    |               |   |
| Deposits:                                                      |   |                 |    |                                  |   |               |   |                 |   |                                  |    |               |   |
| Savings,  NOW, and  Money Market Deposits                 |   | $                    | 130,489 |                                  | $      | (1,235             | )      | 1.27                 | %      | $                                     | 107,945 |               | $      | (1,873 | ) | 2.32 | % |
| Time  deposits                                                 |   | 130,822              |    | (3,196                                | )      | 3.27               | %      | 140,212              |   | (6,052                                | )       | 5.77               | %      |
|                                                           |   |                 |    |                                  |   |               |   |                 |   |                                  |    |               |   |
| Total  interest bearing deposits                               |   | $                    | 261,311 |                                  | $      | (4,431             | )      | 2.27                 | %      | $                                     | 248,157 |               | $      | (7,925 | ) | 4.27 | % |
|                                                           |   |                 |    |                                  |   |               |   |                 |   |                                  |    |               |   |
| Other  borrowings                                              |   | 12,279               |    | (381                                  | )      | 4.15               | %      | 6,879                |   | (244                                  | )       | 4.74               | %      |
| Total  interest bearing liabilities   And interest expense     |   | $                    | 273,590 |                                  | $      | (4,812             | )      | 2.35                 | %      | $                                     | 255,036 |               | $      | (8,169 | ) | 4.28 | % |
|                                                           |   |                 |    |                                  |   |               |   |                 |   |                                  |    |               |   |
| Net  interest income                                           |   |                 |    | $                                     | 16,446 |               |   |                 |   |                                  | $       | 14,629             |   |   |   |
|                                                           |   |                 |    |                                  |   |               |   |                 |   |                                  |    |               |   |
| Net  interest margin as a percent   Of average earning assets: |   |                 |    |                                  |   | 6.84               | %      |                 |   |                                  |    | 6.50               | %      |

 

An analysis of the changein net interest income is as follows for the nine months ended September 30(dollars in thousands):

 
|                                      |   | **2002  compared to 2001  Increase (decrease) due to** |   |     |   |
|-------------------------------------------|--------|--------------------------------------------------------|--------|----------|--------|
|                                      |   | **Volume**                                             |   | **Rate** |   | **Net** |   |
| Interest  earned on:                      |   |                                                   |   |     |   |   |   |
| Loans                                     |   | $                                                      | 2,732  |     | $      | (3,960 | ) | $ | (1,228 | ) |
| Federal  funds sold and deposits in banks |   | (33                                                    | )      | (52      | )      | (85 | ) |
| Investment  securities                    |   | (158                                                   | )      | (69      | )      | (227 | ) |
| Total  Interest income                    |   | 2,541                                                  |   | (4,081   | )      | (1,540 | ) |
|                                      |   |                                                   |   |     |   |   |   |
| Interest  paid on:                        |   |                                                   |   |     |   |   |   |
| Savings,  NOW and MMA                     |   | 516                                                    |   | (1,154   | )      | (638 | ) |
| Time  deposits                            |   | (382                                                   | )      | (2,474   | )      | (2,856 | ) |
| Other  borrowings                         |   | 189                                                    |   | (52      | )      | 137 |   |
| Total  Interest expense                   |   | 323                                                    |   | (3,680   | )      | (3,357 | ) |
|                                      |   |                                                   |   |     |   |   |   |
| Net  interest income                      |   | $                                                      | 2,218  |     | $      | (401 | ) | $ | 1,817 |   |

 

The change in interestdue to both rate and volume has been allocated to volume and rate changes inproportion to the relationship of the absolute dollar amounts of the change ineach.

 

13

----

 

Non-interest incomeincreased by $1,296,000, or 30%, from the first nine months of 2001.  Service charges, primarily due to theimplementation of a new overdraft product in the third quarter of 2001,increased $591,000, or 36%, over the first nine months of 2001.  Origination fees on mortgage loans soldcontinued their strong performance, increasing by $317,000, or 23% over thesame period in 2001.  Non-interestincome for the three months ended September 30, 2002 increased $439,000, or 27%over the prior year.

 

Non-interest expenses forthe first nine months of 2002 increased by $308,000, or 2%, over the first ninemonths of 2001.  Compensation expenseincreased $86,000, or 1%.  Occupancyexpenses increased $23,000, or 1%.  Theother expenses increase of $199,000 included an additional $171,000 in expensesrelated to the operation of the small-loan program, including increasedbusiness and occupation taxes and correspondent bank fees, as well as $113,000in expenses related to the implementation of a new overdraft product in thethird quarter of 2001.  Non-interestexpenses for the third quarter of 2002 decreased $47,000 over the third quarterof 2001.  The ratio of non-interest expenseto average assets decreased to 4.80% for the nine months ended September 30,2002 from 4.98% in 2001.  The ratio ofnet overhead (non-interest expense minus non-interest income) divided byaverage total assets decreased to 2.81% for the nine months ended September 30,2002 from 3.33% for the same period in 2001.

 

**Business Segment Reporting**

 

The Company is managedalong two major lines of business; Community Banking, its core business, andthe small-loan division, which was entered into in the fourth quarter of2000.  Community Banking consists of alllending, deposit and administrative operations conducted through its 19 officesin Washington State.  The small-loandivision provides small, short-term consumer loans to customers in Alabama andArkansas.

 

Prior to 2001, theCompany was managed as a whole, not by discrete operating segments.  When the Company began offering small loans,its operating results were segregated in the General Ledger system to bettermanage financial performance.  Thefinancial performance of the business lines is measured by the Company’sprofitability reporting process, which utilizes various management accountingtechniques to more accurately reflect each business line’s financialresults.  Revenues and expenses areprimarily assigned directly to business lines.

 

The organizationalstructure of the Company and its business line financial results are notnecessarily comparable across companies. As such, the Company’s business line performance may not be directlycomparable with similar information from other financial institutions.

 

Selected comparativefinancial information for the small loan division, which are included in theoverall financial results, as of and for the nine months ended September 30,2002 are as follows (dollars in thousands):

| **Nine months ended September 30, 2002**               |   | **Community  Banking** |    | **Small  Loans** |   | **Total** |   |
|--------------------------------------------------------|--------|------------------------|---------|------------------|--------|-----------|--------|
|                                                   |   |                   |    |             |   |      |   |
| Net  Interest income after provision for credit losses |   | $                      | 12,435  |             | $      | 2,403     |   | $ | 14,838 |   |
| Non-interest  income                                   |   | 5,684                  |    | —           |   | 5,684     |   |
| Non-interest  expense                                  |   | 12,947                 |    | 617              |   | 13,564    |   |
| Income  taxes                                          |   | 1,625                  |    | 595              |   | 2,220     |   |
| Net Income                                             |   | $                      | 3,547   |             | $      | 1,191     |   | $ | 4,738 |   |
| Total assets                                           |   | $                      | 376,991 |             | $      | 17,529    |   | $ | 394,520 |   |
| Total Loans                                            |   | $                      | 295,505 |             | $      | 7,574     |   | $ | 303,079 |   |

 

| **Nine months ended September 30, 2001**               |   | **Community  Banking** |    | **Small  Loans** |   | **Total** |   |
|--------------------------------------------------------|--------|------------------------|---------|------------------|--------|-----------|--------|
|                                                   |   |                   |    |             |   |      |   |
| Net  Interest income after provision for credit losses |   | $                      | 11,921  |             | $      | 1,750     |   | $ | 13,671 |   |
| Non-Interest  income                                   |   | 4,388                  |    | —           |   | 4,388     |   |
| Non-Interest  expense                                  |   | 12,819                 |    | 437              |   | 13,256    |   |
| Income  taxes                                          |   | 1,025                  |    | 447              |   | 1,472     |   |
| Net  Income                                            |   | $                      | 2,465   |             | $      | 866       |   | $ | 3,331 |   |
| Total  assets                                          |   | $                      | 348,366 |             | $      | 19,040    |   | $ | 367,406 |   |
| Total  Loans                                           |   | $                      | 272,318 |             | $      | 7,135     |   | $ | 279,453 |   |

 

14

----

 

**Item 3****              Quantitative andQualitative Disclosure About Market Risk**

 

**Rate Sensitivity**

 

The Company’s assets andliabilities are managed to maximize long-term shareholder returns by optimizingnet interest income within the constraints of maintaining high credit quality,conservative interest rate risk disciplines and prudent levels ofliquidity.  The Asset/LiabilityCommittee meets regularly to monitor the composition of the balance sheet, toassess current and projected interest rate trends, and to formulate strategiesconsistent with established objectives for liquidity, interest rate risk andcapital adequacy.

 

Interest rate sensitivityis closely related to liquidity, as each is directly affected by the maturityof assets and liabilities.  TheCompany’s net interest margin is affected by changes in the level of marketinterest rates.  Management’s objectivesare to monitor and control interest rate risk and ensure predictable andconsistent growth in net interest income.

 

Management considers anyasset or liability that matures, or is subject to re-pricing within one year tobe interest sensitive, although continual monitoring is performed for othertime intervals as well.  The differencebetween interest sensitive assets and liabilities for a defined period of timeis known as the interest sensitivity “gap”, and may be either positive ornegative.  If positive, more assetsre-price before liabilities.  Ifnegative, the reverse is true.  Gapanalysis provides a general measure of interest rate risk but does not addresscomplexities such as prepayment risk, interest rate floors and ceilings imposedon financial instruments, interest rate dynamics and customers’ response tointerest rate changes.  Currently theBanks’ interest sensitivity gap is negative within one year.  Assuming that general market interest ratechanges affected the re-pricing of assets and liabilities in equal magnitudes,this indicates that the effects of rising interest rates on the Company wouldbe a decrease in the net interest margin, whereas falling interest rates wouldcause a corresponding increase in the margin.

 

**Interest Rate Gap Analysis**

**September 30, 2002**

 

| **(dollars in thousands)**            |   | **Within  One Year** |     | **After One  But Within  Five Years** |   | **After  Five Years** |   | **Total** |   |
|---------------------------------------|--------|----------------------|----------|---------------------------------------|--------|-----------------------|--------|-----------|--------|
| Loans                                 |   | $                    | 130,387  |                                  | $      | 137,640               |   | $         | 35,052 |   | $ | 303,079 |   |
| Securities:                           |   |                 |     |                                  |   |                  |   |      |   |
| Available  for sale                   |   | 3,273                |     | 18,035                                |   | 4,249                 |   | 25,557    |   |
| Held  to maturity                     |   | —               |     | 505                                   |   | —                |   | 505       |   |
| Interest  bearing deposits with banks |   | 72                   |     | —                                |   | —                |   | 72        |   |
| Fed  funds sold                       |   | 3,000                |     | —                                |   | —                |   | 3,000     |   |
| Total  Earnings Assets                |   | $                    | 136,732  |                                  | $      | 156,180               |   | $         | 39,301 |   | $ | 332,213 |   |
|                                  |   |                 |     |                                  |   |                  |   |      |   |
| Deposits                              |   |                 |     |                                  |   |                  |   |      |   |
| Savings,  NOW and money market        |   | $                    | 129,093  |                                  | $      | —                |   | $         | — |   | $ | 129,093 |   |
| Time  deposits                        |   | 116,332              |     | 16,695                                |   | —                |   | 133,027   |   |
| Short-term  borrowings                |   | 10,417               |     | —                                |   | —                |   | 10,417    |   |
| Long-term  debt                       |   | —               |     | 1,000                                 |   | $                     | 13,403 |      | 14,403 |   |
|                                  |   |                 |     |                                  |   |                  |   |      |   |
| Total  Interest Bearing Liabilities   |   | $                    | 255,842  |                                  | $      | 17,695                |   | 13,403    |   | $ | 286,940 |   |
|                                  |   |                 |     |                                  |   |                  |   |      |   |
| Net  Interest Rate Sensitivity Gap    |   | $                    | (119,110 | )                                     | $      | 138,485               |   | $         | 25,898 |   | $ | 45,273 |   |

 

The Company’s market riskis impacted by changes in interest rates. Other types of market risk, such as foreign currency exchange rate riskand commodity price risk, do not arise in the normal course of the Company’sbusiness.

 

The Company has marketrisk in the form of interest rate risk on its financial assets.  In an effort to understand the relativeimpact of this risk on the Company’s current financial situation, a processknown as a rate shock is applied to the current financial assets.

 

15

----

 

Rate shock is a processwherein the characteristics of the financial assets of the Company are reviewedin the event they are subjected to an instantaneous and complete adjustment inthe market rate of interest.  Theseresults are modeled to determine the effects on interest rate margin for thesucceeding twelve months from the re-pricing of variable rate assets andliabilities where applicable.  The levelof impact on the various assets and liabilities are also estimated for theirsensitivity to pricing changes of such a market interest rate change.  According to this model and its assumptions,the change in net interest income over a 12 month period in the event marketinterest rates were to immediately rise or fall by 100 basis points isestimated to be $105,000.

 

**Item 4****.****                                        DisclosureControls and Procedures**

 

(a)                        Evaluationof Disclosure Controls and Procedures.

 

Management of theCompany, including the Chief Executive Officer and the Chief Financial Officer,have conducted an evaluation of the Company’s disclosure controls and proceduresin accordance with rule 13a-14 under the Securities Exchange Act of 1934 as ofa date (the “evaluation date”) within 90 days prior to the filing date of thisreport.  Based on that evaluation, theChief Executive Officer and the Chief Financial Officer have concluded that, asof the evaluation date, the Company’s disclosure controls and procedures wereeffective in ensuring that all material information relating to the Companyrequired to be filed in this quarterly report has been made known to them in atimely manner.

 

(b)                       Changesin Internal Controls

 

Since the evaluationdate, there have been no changes to the Company’s internal controls or in otherfactors that could significantly affect those controls.

 

**PARTII - OTHER INFORMATION**

 

**Item 6****                                           Exhibitsand Reports on Form 8-K**

 
| (a)    | Exhibits                                                                                                                                                                                                                                                                   |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | The following exhibit  is filed herewith, and this list constitutes the exhibit index:                                                                                                                                                                                     |
|   |                                                                                                                                                                                                                                                                       |
|   | 99.1 Certification of  CEO and CFO under Section 906 of Sarbanes-Oxley Act of 2002                                                                                                                                                                                         |
|   |
| (b)    | Reports on Form 8-K                                                                                                                                                                                                                                                        |
|   | On August 5, 2002, the  Company filed a report on Form 8-K to report the execution of a definitive  agreement with Harbor Bank, N.A. pursuant to which Harbor Bank would merge  with First Community Bank of Washington, the Company’s wholly owned  subsidiary bank. |
|        |                                                                                                                                                                                                                                                                            |  |

 

16

----

 

**SIGNATURES**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 

 
|   Date March  19, 2003 | FIRST COMMUNITY  FINANCIAL GROUP, INC. |
|----------------------------------|----------------------------------------|
|                             | (Registrant)                      |
|                             |                                   |
|                             |                                   |
|                             | By:                                    | /s/ Ken F. Parsons, Sr. |   |
|                             |                                   | Ken F. Parsons, Sr. |
|                             |                                   | President, Chief  Executive Officer  |
|                             |                                   |
|                             |                                   |
|                             | By:                                    | /s/ Thomas L. Dhamers |   |
|                             |                                   | Thomas L. Dhamers |
|                             |                                   | Vice President,  Controller |
|                             |                                   | (Principal Accounting  Officer) |
|                                  |                                        |  |  |  |

 

17

----

 

**CERTIFICATIONUNDER SECTION 302**

**OFSARBANES-OXLEY ACT OF 2002**

 

I, Ken F. Parsons, Sr.certify that:

 

1. I have reviewed thisquarterly report on Form 10-Q of First Community Financial Group, Inc. (the“registrant”);

 

2. Based on my knowledge,this report does not contain any untrue statement of a material fact or omit tostate a material fact necessary to make the statements made, in light of thecircumstances under which such statements were made, not misleading withrespect to the period covered by this report;

 

3. Based on my knowledge,the financial statements, and other financial information included in thisreport, fairly present in all material respects the financial condition,results of operations and cash flows of the registrant as of, and for, theperiods presented in this report;

 

4. The registrant’s othercertifying officers and I are responsible for establishing and maintainingdisclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and15d-14) for the registrant and we have:

 

a) designed suchdisclosure controls and procedures to ensure that material information relatingto the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which thisquarterly report is being prepared;

 

b) evaluated theeffectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this report (the “EvaluationDate”); and

 

c) presented inthis report our conclusions about the effectiveness of the disclosure controlsand procedures based on our evaluation as of the Evaluation Date;

 

5. The registrant’s othercertifying officers and I have disclosed, based on our most recent evaluation,to the registrant’s auditors and the audit committee of registrant’s board ofdirectors (or persons performing the equivalent function):

 

a) all significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b) any fraud, whetheror not material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

 

6. The registrant’s othercertifying officers and I have indicated in this report whether or not therewere significant changes in internal controls or in other factors that couldsignificantly affect internal controls subsequent to the date of our mostrecent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 

 
| Date March 19, 2003 | /s/ Ken F. Parsons, Sr.             |   |
|---------------------|-------------------------------------|--------|
|                | Ken F. Parsons, Sr.                 |
|                | President, Chief  Executive Officer |

 

18

----

 

**CERTIFICATIONUNDER SECTION 302**

**OFSARBANES-OXLEY ACT OF 2002**

 

I,Thomas L. Dhamerscertify that:

 

1. I have reviewed thisquarterly report on Form 10-Q of First Community Financial Group, Inc. (the“registrant”);

 

2. Based on my knowledge,this report does not contain any untrue statement of a material fact or omit tostate a material fact necessary to make the statements made, in light of thecircumstances under which such statements were made, not misleading withrespect to the period covered by this report;

 

3. Based on my knowledge,the financial statements, and other financial information included in thisreport, fairly present in all material respects the financial condition,results of operations and cash flows of the registrant as of, and for, theperiods presented in this report;

 

4. The registrant’s othercertifying officers and I are responsible for establishing and maintainingdisclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and15d-14) for the registrant and we have:

 

a) designed suchdisclosure controls and procedures to ensure that material information relatingto the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which thisquarterly report is being prepared;

 

b) evaluated theeffectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this report (the “EvaluationDate”); and

 

c) presented inthis report our conclusions about the effectiveness of the disclosure controlsand procedures based on our evaluation as of the Evaluation Date;

 

5. The registrant’s othercertifying officers and I have disclosed, based on our most recent evaluation,to the registrant’s auditors and the audit committee of registrant’s board ofdirectors (or persons performing the equivalent function):

 

a) all significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b) any fraud,whether or not material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

 

6. The registrant’s othercertifying officers and I have indicated in this report whether or not therewere significant changes in internal controls or in other factors that couldsignificantly affect internal controls subsequent to the date of our mostrecent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 

 
| Date March 19, 2003 | /s/ Thomas L. Dhamers                                      |   |
|---------------------|------------------------------------------------------------|--------|
|                | Thomas L. Dhamers                                          |
|                | Vice  President/Controller  (Principal Accounting Officer) |

 

19

----