----

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**SECURITIESAND EXCHANGE COMMISSION****Washington, D.C. 20549**

**FORM  10-Q**

**(Mark one)**
| **ý** | **QUARTERLY  REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES** |
|------------|-------------------------------------------------------------------|
|       | **EXCHANGE  ACT OF 1934**                                         |

**For the quarterly period ended June30, 2001**

**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    **

| **First Community Financial Group,  Inc.******         |
|--------------------------------------------------------|
| (Exact name of registrant 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****** | **(360) 459-1100******               |
| (Address of principal executive offices)                             | Registrant's telephone number:       |

Indicate bycheck mark whether the registrant (1) has filed all reports required to befiled by Section 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. Yes  ý  No  o

Indicate thenumber of shares outstanding in each of the issuer’s classes of common stock,as of the latest practicable date.

| Title of Class****            | Outstanding at June 30, 2001**** |
|-------------------------------|----------------------------------|
| Common Stock, $2.50 par value | 2,186,681                        |

----

----

 

**FirstCommunity Financial Group, Inc.**Table of Contents

| PART I - 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 of Financial Condition and Analysis or Plan of Operations |
|                           |   |
| PART II - OTHER INFORMATION    |
|                           |   |
| Item  4                        | Submission  of Matters to Vote of Security Holders |
|                           |   |
|                           |   |
| SIGNATURES                     |   |

 

**FIRST COMMUNITY FINANCIAL GROUP,INC. and SUBSIDIARIES**CondensedConsolidated Balance Sheets (Unaudited)

 

| *(Dollars  in thousands)*                                                                                                                     |                                                 |        |        |        |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------------------------------------------------|-------------|-------------|-------------|
|                                                                                                                                               |                                                      |             |             |        |
|                                                                                                                                          | June 30                                              |        | December 31 |        |
|                                                                                                                                          | 2001                                                 |        | 2000        | ** **  |
|                                                                                                                                               |                                                      |             |             |        |
|                                                                                                                                          |                                                 |        |        |        |
| **Assets**                                                                                                                                    |                                                 | ** **  |        | ** **  |
| Cash and due from banks                                                                                                                       | $                                                    | 19,940      |        | $           | 12,640 |   |
| Interest bearing deposits in banks                                                                                                            | 154                                                  |        | 172         |        |
| Securities available for sale                                                                                                                 | 22,832                                               |        | 24,875      |        |
| Securities held to maturity                                                                                                                   | 676                                                  |        | 676         |        |
| Federal Home Loan Bank stock                                                                                                                  | 1,916                                                |        | 1,854       |        |
| Loans held for sale                                                                                                                           | 6,704                                                |        | 4,121       |        |
|                                                                                                                                          |                                                 |        |        |        |
| Loans                                                                                                                                         | 271,950                                              |        | 255,183     |        |
| Allowance for credit losses                                                                                                                   | 3,503                                                |        | 3,503       |        |
|                                                                                                                                          | **Net  loans**                                       | **268,447** | ** **  | **251,680** | ** ** |
|                                                                                                                                          |                                                 |        |        |        |   |
| Premises and equipment                                                                                                                        | 10,524                                               |        | 10,067      |        |
| Foreclosed real estate                                                                                                                        | 4,239                                                |        | 4,097       |        |
| Accrued interest receivable                                                                                                                   | 1,559                                                |        | 1,817       |        |
| Cash value of life insurance                                                                                                                  | 8,120                                                |        | 3,110       |        |
| Goodwill                                                                                                                                      | 6,472                                                |        | 6,677       |        |
| Other assets                                                                                                                                  | 717                                                  |        | 2,449       |        |
|                                                                                                                                          |                                                 |        |        |        |
|                                                                                                                                          | **Total  assets**                                    | **$**       | **352,300** | ** **  | **$** | **324,235** | ** ** |
|                                                                                                                                          |                                                 |        |        |        |
|                                                                                                                                          |                                                 |        |        |        |
| **Liabilities**                                                                                                                               |                                                 | ** **  |        | ** **  |
| Deposits:                                                                                                                                     |                                                 |        |        |        |
|                                                                                                                                          | Non-interest bearing                                 | $           | 51,542      |        | $ | 48,715 |   |
|                                                                                                                                          | Savings and interest bearing demand                  | 113,988     |        | 98,036      |   |
|                                                                                                                                          | Time deposits                                        | 138,120     |        | 124,626     |   |
| **Total  deposits**                                                                                                                           | **303,650**                                          | ** **  | **271,377** | ** **  |
|                                                                                                                                          |                                                 |        |        |        |
|                                                                                                                                          |                                                 |        |        |        |
| Federal funds purchased                                                                                                                       | 4,600                                                |        | 2           |        |
| Short term borrowing                                                                                                                          | 3,268                                                |        | 13,999      |        |
| Long term debt                                                                                                                                | 1,214                                                |        | 1,303       |        |
| Accrued interest payable                                                                                                                      | 378                                                  |        | 450         |        |
| Other liabilities                                                                                                                             | 2,636                                                |        | 2,731       |        |
| **Total  liabilities**                                                                                                                        | **315,746**                                          | ** **  | **289,862** | ** **  |
|                                                                                                                                          |                                                 |        |        |        |
| **Stockholders’  Equity**                                                                                                                |                                                 | ** **  |        | ** **  |
| Common stock, par value $2.50 per share;  10,000,000 shares authorized, 2,186,681 shares issued in 2001, and 2,159,638  shares issued in 2000 | 5,467                                                |        | 5,460       |        |
| Surplus                                                                                                                                       | 23,119                                               |        | 23,099      |        |
| Retained earnings                                                                                                                             | 7,975                                                |        | 6,349       |        |
| Accumulated other comprehensive income (loss)                                                                                                 | 107                                                  |        | (332        | )           |
| Debt related to KSOP                                                                                                                          | (114                                                 | )           | (203        | )           |
|                                                                                                                                          | **Total  stockholders’ equity**                 | **36,554**  | ** **  | **34,373**  | ** ** |
|                                                                                                                                          |                                                 |        |        |        |
|                                                                                                                                          | **Total  liabilities and stockholders’ equity** | **$**       | **352,300** | ** **  | **$** | **324,235** | ** ** |

*Seenotes to condensed consolidated financial statements*

 

**FIRST COMMUNITY FINANCIAL GROUP, INC. and SUBSIDIARIES**CondensedConsolidated Statements of Income and Comprehensive Income (Unaudited)

| *(Dollars in thousands, except  per share amounts)*                                 |                                                       |       |                      |       |       |       |       |       |
|-------------------------------------------------------------------------------------|------------------------------------------------------------|------------|---------------------------|------------|------------|------------|------------|------------|
|                                                                                     | ****                                                       | ****       | ****                      | ****       | ****       | ****       | ****       |       |
|                                                                                | Three months ended  June 30                                |       | Six months ended  June 30 |       |
|                                                                                |                                                       |       |
|                                                                                | 2001                                                       |       | 2000                      |       | 2001       |       | 2000       | ** ** |
|                                                                                     | ****                                                       | ****       | ****                      | ****       | ****       | ****       | ****       | ** ** |
|                                                                                |                                                       |       |                      |       |       |       |       |       |
| **Interest  income**                                                                |                                                       |       |                      |       |       |       |       |       |
|                                                                                | Loans                                                      | $          | 7,222                     |       | $          | 6,194      |       | $          | 13,924 |   | $ | 12,389 |   |
|                                                                                | Federal funds sold  and deposits in banks                  | 42         |                      | 78         |       | 98         |       | 82         |   |
|                                                                                | Investments                                                | 400        |                      | 445        |       | 808        |       | 899        |   |
|                                                                                | **Total  interest income**                                 | **7,664**  | ** **                | **6,717**  | ** ** | **14,830** | ** ** | **13,370** | ** ** |
| **Interest  Expense**                                                               |                                                       | ** ** |                      | ** ** |       | ** ** |       | ** ** |
|                                                                                | Deposits                                                   | 2,648      |                      | 2,458      |       | 5,425      |       | 4,369      |   |
|                                                                                | Other                                                      | 107        |                      | 237        |       | 164        |       | 533        |   |
|                                                                                | **Total  interest expense**                                | **2,755**  | ** **                | **2,695**  | ** ** | **5,589**  | ** ** | **4,902**  | ** ** |
|                                                                                | **Net  interest income**                                   | **4,909**  | ** **                | **4,022**  | ** ** | **9,241**  | ** ** | **8,468**  | ** ** |
| **Provision  for credit losses**                                                    | **300**                                                    | ** ** | **120**                   | ** ** | **445**    | ** ** | **290**    | ** ** |
|                                                                                | **Net  interest income after provision for credit losses** | **4,609**  |                      | **3,902**  |       | **8,796**  |       | **8,178**  |   |
| **Non-interest  income**                                                            |                                                       | ** ** |                      | ** ** |       | ** ** |       | ** ** |
|                                                                                | Service charges on  deposit accounts                       | 482        |                      | 503        |       | 940        |       | 962        |   |
|                                                                                | Origination fees on  mortgage loans sold                   | 475        |                      | 206        |       | 901        |       | 441        |   |
|                                                                                | Other income                                               | 339        |                      | 459        |       | 946        |       | 1,041      |   |
|                                                                                | **Total  non-interest income**                             | **1,296**  | ** **                | **1,168**  | ** ** | **2,787**  | ** ** | **2,444**  | ** ** |
| **Non-interest  expense**                                                           |                                                       | ** ** |                      | ** ** |       | ** ** |       | ** ** |
|                                                                                | Salaries and  employee benefits                            | 2,368      |                      | 2,052      |       | 4,567      |       | 4,181      |   |
|                                                                                | Occupancy and  equipment                                   | 639        |                      | 537        |       | 1,206      |       | 1,094      |   |
|                                                                                | Other expense                                              | 1,469      |                      | 1,131      |       | 2,822      |       | 2,261      |   |
|                                                                                | **Total  non-interest expense**                            | **4,476**  | ** **                | **3,720**  | ** ** | **8,595**  | ** ** | **7,536**  | ** ** |
| **Operating  income before income taxes**                                           | **1,429**                                                  | ** ** | **1,350**                 | ** ** | **2,988**  | ** ** | **3,086**  | ** ** |
| Income Taxes                                                                        | 437                                                        |       | 451                       |       | 925        |       | 1,048      |       |
|                                                                                |                                                       |       |                      |       |       |       |       |       |
| **Net  income**                                                                     | **$**                                                      | **992**    | ** **                | **$**      | **899**    | ** ** | **$**      | **2,063**  | ** ** | **$** | **2,038** | ** ** |
| **Other  comprehensive income, net of tax**                                         |                                                       | ** ** |                      | ** ** |       | ** ** |       | ** ** |
|                                                                                | Unrealized holding  gains (losses) on securities           |       |                      |       |       |       |       |       |   |
|                                                                                |  arising during the period                            | (51        | )                         | (40        | )          | 439        |       | (60        | ) |
|                                                                                |                                                       | ** ** |                      | ** ** |       | ** ** |       | ** ** |
| **Comprehensive  income**                                                           | **$**                                                      | **941**    | ** **                | **$**      | **859**    | ** ** | **$**      | **2,502**  | ** ** | **$** | **1,978** | ** ** |
|                                                                                |                                                       |       |                      |       |       |       |       |       |
| **Earnings  per share data**                                                        |                                                       | ** ** |                      | ** ** |       | ** ** |       | ** ** |
|                                                                                | **Basic  earnings per share**                              | **$**      | **0.46**                  | ** ** | **$**      | **0.42**   | ** ** | **$**      | **0.95** | ** ** | **$** | **0.95** | ** ** |
|                                                                                | **Diluted  earnings per share**                            | **$**      | **0.44**                  | ** ** | **$**      | **0.40**   | ** ** | **$**      | **0.92** | ** ** | **$** | **0.91** | ** ** |
|                                                                                |                                                       |       |                      |       |       |       |       |       |   |
| Weighted average  number of common shares                                           | 2,178,210                                                  |       | 2,147,098                 |       | 2,177,337  |       | 2,153,320  |       |
| Weighted average  number of common shares  - including  dilutive stock options | 2,229,658                                                  |       | 2,238,808                 |       | 2,234,401  |       | 2,245,029  |       |
| Return on average  assets                                                           | 1.14                                                       | %          | 1.12                      | %          | 1.22       | %          | 1.32       | %          |
|                                                                                |                                                       |       |                      |       |       |       |       |       |
| Dividends per share                                                                 | $                                                          | 0.10       |                      | $          | 0.10       |       | $          | 0.20       |   | $ | 0.20 |   |
|                                                                                     |                                                            |            |                           |            |            |            |            |            |  |  |  |  |  |  |

*Seenotes to condensed consolidated financial statements*

**FIRST COMMUNITY FINANCIAL GROUP, INC. and SUBSIDIARIES**CondensedConsolidated Statements of Stockholders’ Equity (Unaudited)Six MonthsEnded June 30, 2000 and 2001

| *(Dollars  in thousands)*       |                                  |      |        |       |         |       |              |      |        |       |      |       |
|---------------------------------|---------------------------------------|-----------|-------------|------------|--------------|------------|-------------------|-----------|-------------|------------|-----------|------------|
|                                 | ****                                  |           | ****        |            | ****         |            | ****              |           | ****        |            | ****      |       |
|                            |                                  |      |        |       |         |       | **Accumulated**   |      |        |
|                            |                                  |      |        |       |         |       | **Other**         |      | **Debt**    |       |      |       |
|                            | **Common**                            |      |        |       | **Retained** |       | **Comprehensive** |      | **Related** |       |      |       |
|                            | **Stock**                             |      | **Surplus** |       | **Earnings** |       | **Income (Loss)** |      | **to KSOP** |       | **Total** |       |
|                            |                                  |      |        |       |         |       |              |      |        |       |      |       |
| **Balance,  December 31, 1999** | **$**                                 | **5,443** | ** **  | **$**      | **23,428**   | ** ** | **$**             | **2,855** | ** **  | **$**      | **(728**  | **)**      | **$** | **(380** | **)** | **$** | **30,618** | ** ** |
|                            |                                  |      |        |       |         |       |              |      |        |       |      |       |
|                            | Net income                            | - -       |        | - -        |         | 2,038      |              | - -       |        | - -        |      | 2,038      |   |
|                            |                                  |      |        |       |         |       |              |      |        |       |      |       |
|                            | Stock options  exercised              | 56        |        | 206        |         | - -        |              | - -       |        | - -        |      | 262        |   |
|                            |                                  |      |        |       |         |       |              |      |        |       |      |       |
|                            | Cash dividend  ($0.20 per share)      | - -       |        | - -        |         | (435       | )                 | - -       |        | - -        |      | (435       | ) |
|                            |                                  |      |        |       |         |       |              |      |        |       |      |       |
|                            | Stock repurchased                     | (100      | )           | (834       | )            | - -        |              | - -       |        | - -        |      | (934       | ) |
|                            |                                  |      |        |       |         |       |              |      |        |       |      |       |
|                            | Other comprehensive  income           | - -       |        | - -        |         | - -        |              | (60       | )           | - -        |      | (60        | ) |
|                            |                                  |      |        |       |         |       |              |      |        |       |      |       |
|                            | Net decrease in  debt related to KSOP | - -       |        | - -        |         | - -        |              | - -       |        | 88         |      | 88         |   |
|                            |                                  |      |        |       |         |       |              |      |        |       |      |       |
|                            | **Balance,  June 30, 2000**           | **5,399** | ** **  | **22,800** | ** **   | **4,458**  | ** **        | **(788**  | **)**       | **(292**   | **)**     | **31,577** | ** ** |
|                            |                                  |      |        |       |         |       |              |      |        |       |      |       |
| **Balance,  December 31, 2000** | **$**                                 | **5,460** | ** **  | **$**      | **23,099**   | ** ** | **$**             | **6,349** | ** **  | **$**      | **(332**  | **)**      | **$** | **(203** | **)** | **$** | **34,373** | ** ** |
|                            |                                  |      |        |       |         |       |              |      |        |       |      |       |
|                            | Net income                            | - -       |        | - -        |         | 2,063      |              | - -       |        | - -        |      | 2,063      |   |
|                            |                                  |      |        |       |         |       |              |      |        |       |      |       |
|                            | Stock options  exercised              | 7         |        | 20         |         | - -        |              | - -       |        | - -        |      | 27         |   |
|                            |                                  |      |        |       |         |       |              |      |        |       |      |       |
|                            | Cash dividend  ($0.20 per share)      | - -       |        | - -        |         | (437       | )                 | - -       |        | - -        |      | (437       | ) |
|                            |                                  |      |        |       |         |       |              |      |        |       |      |       |
|                            | Other comprehensive  income           | - -       |        | - -        |         | - -        |              | 439       |        | - -        |      | 439        |   |
|                            |                                  |      |        |       |         |       |              |      |        |       |      |       |
|                            | Net decrease in  debt related to KSOP | - -       |        | - -        |         | - -        |              | - -       |        | 89         |      | 89         |   |
|                            |                                  |      |        |       |         |       |              |      |        |       |      |       |
|                            | **Balance,  June 30, 2001**           | **$**     | **5,467**   | ** ** | **$**        | **23,119** | ** **        | **$**     | **7,975**   | ** ** | **$**     | **107**    | ** ** | **$** | **(114** | **)** | **$** | **36,554** | ** ** |
|                                 |                                       |           |             |            |              |            |                   |           |             |            |           |            |  |  |  |  |  |  |  |  |  |

*See notes to condensed consolidated financial statements*

**FIRST COMMUNITY FINANCIAL GROUP, INC. and SUBSIDIARIES**CondensedConsolidated Statements of Cash Flows (Unaudited)

 

| *(Dollars  in thousands)*                                       |                                                                   |        |       |        |
|-----------------------------------------------------------------|------------------------------------------------------------------------|-------------|------------|-------------|
|                                                                 | ****                                                                   | ****        | ****       |        |
|                                                            | Six months ended  June 30                                              |        |
|                                                            |                                                                   |
|                                                            | 2001                                                                   |        | 2000       |        |
|                                                                 | ****                                                                   | ****        | ****       |        |
| **Cash  Flows from Operating Activities**                       |                                                                   |        |       |        |
|                                                            | Net Income                                                             | $           | 2,063      |        | $ | 2,038 |   |
|                                                            | Adjustments to  reconcile net income to net cash provided by (used in) |        |       |        |   |
|                                                            | Operating activities:                                                  |        |       |        |   |
|                                                            | Provision for  credit losses                                           | 445         |       | 290         |   |
|                                                            | Depreciation and  amortization                                         | 540         |       | 538         |   |
|                                                            | Amortization of  intangible assets                                     | 205         |       | 204         |   |
|                                                            | Increase in cash  value of life insurance                              | (2          | )          | (57         | ) |
|                                                            | Other – net                                                       | 1,221       |       | (414        | ) |
|                                                            | Originations of  loans held for sale                                   | (41,241     | )          | (21,220     | ) |
|                                                            | Proceeds from sales  of loans held for sale                            | 38,658      |       | 20,743      | ** ** |
|                                                            | **Net  cash provided by operating activities**                         | **1,889**   | ** ** | **2,122**   | ** ** |
|                                                            |                                                                   |        |       |        |
| **Cash  Flows from Investing Activities**                       |                                                                   | ** **  |       | ** **  |
|                                                            | Net (increase)  decrease in interest bearing deposits in banks         | 18          |       | (36         | ) |
|                                                            | Net increase in  Federal funds sold                                    | 0           |       | (420        | ) |
|                                                            | Proceeds from  maturities of available-for-sale securities             | 2,805       |       | 937         |   |
|                                                            | Net increase in  loans                                                 | (17,212     | )          | (22,335     | ) |
|                                                            | Proceeds from sale  of other real estate                               | 164         |       | 1,331       |   |
|                                                            | Additions to  premises and equipment                                   | (997        | )          | (906        | **)** |
|                                                            | Purchase of life  insurance                                            | (5,008      | )          | 0           | ** ** |
|                                                            | **Net  cash used by investing activities**                             | **(20,230** | **)**      | **(21,429** | **)** |
|                                                            |                                                                   |        |       |        |
| **Cash  Flows from Financing Activities**                       |                                                                   | ** **  |       | ** **  |
|                                                            | Net increase in  deposits                                              | 32,273      |       | 30,006      |   |
|                                                            | Net decrease in  short-term borrowings                                 | (6,133      | )          | (6,435      | ) |
|                                                            | Sale of common  stock                                                  | 27          |       | 262         |   |
|                                                            | Repurchase of  common stock                                            | 0           |       | (934        | ) |
|                                                            | Repayment of  long-term borrowings                                     | (89         | )          | (89         | ) |
|                                                            | Payment of  dividends                                                  | (437        | )          | (434        | **)** |
|                                                            | **Net  cash provided by financing activities**                         | **25,641**  | ** ** | **22,376**  | ** ** |
|                                                            |                                                                   |        |       |        |
|                                                            | **Net  change in cash and due from banks**                             | **7,300**   | ** ** | **3,069**   | ** ** |
|                                                            |                                                                   |        |       |        |
| **Cash  and Due from Banks:**                                   |                                                                   | ** **  |       | ** **  |
|                                                            | Beginning of period                                                    | 12,640      |       | 10,349      |   |
|                                                            |                                                                   |        |       |        |
|                                                            | **End  of period**                                                     | **$**       | **19,940** | ** **  | **$** | **13,418** | ** ** |
|                                                            |                                                                   |        |       |        |   |   |   |
| **Supplemental  Disclosures of Cash Flow Information:**         |                                                                   | ** **  |       | ** **  |
|                                                            | **Cash  payments for:**                                                |        | ** ** |        | ** ** |
|                                                            | Interest                                                               | $           | 5,661      |        | $ | 4,857 |   |
|                                                            | Taxes                                                                  | 865         |       | 985         |   |
|                                                            |                                                                   |        |       |        |
| **Supplemental  Disclosures of Non-Cash Investing Activities:** |                                                                   | ** **  |       | ** **  |
|                                                            | Other real estate  acquired in settlement of loans                     | 56          |       | 647         |   |
|                                                            | Decrease in  guarantee of KSOP obligation                              | (89         | )          | (88         | ) |
|                                                                 |                                                                        |             |            |             |  |  |  |  |

*See notes to condensed consolidated financial statements*

**FIRST COMMUNITY FINANCIAL GROUP, INC. and SUBSIDIARIES**Notes toCondensed Consolidated Financial Statements(Unaudited)

**1.             Basis of Presentation**

The accompanyingunaudited consolidated financial statements have been prepared in accordancewith generally accepted accounting principles for interim financial informationand with instructions to Form 10-Q and Rule 10-01 of Regulation S-X.  Accordingly, they do not include all of theinformation and footnotes required by generally accepted accounting principlesfor complete financial statements.  Inthe opinion of management, adjustments considered necessary for a fairpresentation (consisting of normally recurring accruals) have beenincluded.  Operating results for the sixmonths ended June 30, 2001 are not necessarily indicative of the resultsanticipated for the year ending December 31, 2001.  

The preparation offinancial statements in conformity with generally accepted accountingprinciples requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities and disclosure of contingentassets and liabilities at the date of the financial statements and the reportedamounts of revenues and expenses during the reporting period.  Actual results could differ from thoseestimates.

**2.             Basic and Diluted Earnings PerShare**

Basic earnings pershare are calculated by dividing net income by the weighted average number ofcommon 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 June 30,                                 |      | Six Months  Ended June 30, |      |
|-------------------------|--------------------------------------------------------------|-----------|----------------------------|-----------|
|                    |                                                         |      |                       |      |
|                    | 2001                                                         |      | 2000                       |      | 2001 |   | 2000 |   |
|                    |                                                         |      |                       |      |   |   |   |   |
| Basic EPS computation   |                                                         |      |                       |      |   |   |   |   |
|                    | Numerator - Net Income                                       | $         | 992,000                    |      | $ | 899,000 |   | $ | 2,063,000 |   | $ | 2,038,000 |   |
|                    |                                                         |      |                       |      |   |   |   |   |
|                    | Denominator - Weighted Average common shares  outstanding    | 2,178,210 |                       | 2,147,098 |   | 2,177,337 |   | 2,153,320 |   |
|                    |                                                         |      |                       |      |   |   |   |   |
| Basic EPS               | $                                                            | .46       |                       | $         | .42 |   | $ | .95 |   | $ | .95 |   |
|                    |                                                         |      |                       |      |   |   |   |   |
| Diluted EPS computation | $                                                            | 992,000   |                       | $         | 899,000 |   | $ | 2,063,000 |   | $ | 2,038,000 |   |
|                    | Numerator - Net Income                                       |      |                       |      |   |   |   |   |   |
|                    |                                                         |      |                       |      |   |   |   |   |   |
|                    | Denominator - Weighted average common shares  outstanding    | 2,178,210 |                       | 2,147,098 |   | 2,177,337 |   | 2,153,320 |   |
|                    |                                                         |      |                       |      |   |   |   |   |
|                    | Effect of dilutive stock options                             | 51,448    |                       | 91,710    |   | 57,064 |   | 91,709 |   |
|                    |                                                         |      |                       |      |   |   |   |   |
|                    | Weighted average common shares and common stock  equivalents | 2,229,658 |                       | 2,238,808 |   | 2,234,401 |   | 2,245,029 |   |
|                    |                                                         |      |                       |      |   |   |   |   |
| Diluted EPS             | $                                                            | .44       |                       | $         | .40 |   | $ | .92 |   | $ | .91 |   |

 

**Management'sDiscussion and Analysis of Financial Condition and Results of Operations**

This discussioncontains certain forward-looking statements within the meaning of the federalsecurities laws.  Actual results and thetiming of certain events could differ materially from those projected in theforward-looking statements due to a number of factors.

**FinancialCondition**

Overview

The Company’sconsolidated total assets at June 30, 2001 of $352,300,000 represents an 8.7%increase over December 31, 2000 assets of $324,235,000.  The growth in assets was primarily made upof growth in loan demand.  Loanbalances, net of allowance for credit losses, increased $19,350,000, or 7.6%,in the first half to $275,151,000 from $255,801,000 at December 31, 2000.  Cash and due from banks also increased by$7,300,000 over the prior year end balances. 

Nonperforming assetswere as follows (dollars in thousands):

|                                    | June 30 |      | December 31 |   |
|-----------------------------------------|---------|-----------|-------------|--------|
|                                    | 2001    |      | 2000        |   |
|                                    |    |      |        |   |
| Non-accrual loans                       | $       | 1,528     |        | $      | 857 |   |
| Accruing loans past due 90 days or more | 360     |      | 1,264       |   |
| Foreclosed real estate                  | 4,296   |      | 4,097       |   |
| Other assets                            | 0       |      | 7           |   |
|                                    | **$**   | **6,184** | ** **  | **$**  | **6,225** | ** ** |

Total non-accrualloans and accruing loans past due 90 days or more decreased by $233,000, or11.0% from the Decmeber 31, 2000 level. Foreclosed real estate increased $142,000, or 3.5% over the same period.

The allowance forcredit losses reflects management’s current estimate of the amount required toabsorb losses on existing loans and commitments to extend credit.  Determination of the appropriate level ofthe allowance is based on an analysis of various factors including historicalloss experience based on volumes and types of loans; volumes and trends indelinquencies and non-accrual loans; trends in portfolio volume; results ofinternal and independent external credit reviews; and anticipated economicconditions.  An analysis of the adequacyof the allowance is subject to quarterly review by the Board of Directors.  Based on this analysis, management considersthe allowance for credit losses to be adequate.

The allowance forcredit losses remained at the same level for the first half of 2001.  The ratio of allowance for credit losses tototal loans decreased to 1.29% from 1.37% at December 31, 2000.  The dollar value change in the allowanceconsisted of $445,000 of provision and $445,000 in net charged off loans. 

Investment securitiesdecreased by $1,981,000, or 7.2% during the first half to total$25,424,000.  Securities have continuedto decease due to maturities, call provisions or prepayments made onasset-backed securities.  No additionalsecurities purchases were made in the six month period due to loan growth andmaintaining funds in correspondent accounts. Portfolio balances are managed in conjunction with the remainder of thebalance sheet and support the lending and depository functions of theBank.  Balances will increase anddecrease to meet liquidity demands. 

Total depositsincreased $32,273,000, or 11.9% in the first half to $303,650,000.  Non-interest bearing demand increased  by 5.8%. Savings and interest bearing demand increased $15,952,000, or 16.3%,primarily due to promotional money market programs related to the opening ofnew branches.  Time deposits alsoincreased by $13,494, or 10.8% during the first half of 2001.  Short term borrowing has been reduced by$6,133,000 due to the growth in deposit balances.

 

Liquidity and RateSensitivity

The Company’s assetsand liabilities are managed to maximize long-term shareholder returns byoptimizing net interest income within the constraints of maintaining highcredit quality, conservative interest rate risk disciplines and prudent levelsof liquidity.  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.

Liquidity management involves the ability to meet cash flow requirementsof customers who may be either depositors wanting to withdraw funds orborrowers needing assurance that sufficient funds will be available to meettheir credit needs.  Liquidity isgenerated from both internal and external sources.  Internal sources are those assets that can be converted to cashwith little or no risk of loss.  Theseinclude overnight investments in federal funds sold and investment securities,particularly those of shorter maturity, and are the principal source of assetliquidity.  At June 30, 2001, cash,deposits in banks, Federal funds sold and securities available for sale totaled$44,842,000.  External sources refer tothe ability to attract new liabilities and capital.  They include increasing savings and demand deposits, federalfunds purchased, and the issuance of capital and debt securities.  At June 30, 2001, borrowing lines of credittotaled $42,230,000.  These creditfacilities are being used regularly as a source of funds as a result of loangrowth. $4,600,000 was being borrowed against these lines of credit in the formof federal funds purchased and term advances as of June 30, 2001.

Management believesthe Bank's liquidity position at June 30, 2001, was adequate to meet its shortterm funding requirements.

Interest ratesensitivity is closely related to liquidity, as each is directly affected bythe maturity of assets and liabilities. The Company’s net interest margin is affected by changes in the level ofmarket interest rates.  Management’sobjectives are to monitor and control interest rate risk and ensure predictableand consistent growth in net interest income. 

Management considersany asset or liability which matures, or is subject to repricing within oneyear to be interest sensitive, although continual monitoring is performed forother time intervals as well.  Thedifference between interest sensitive assets and liabilities for a definedperiod of time is known as the interest sensitivity "gap", and may beeither positive or negative.  Ifpositive, more assets reprice before liabilities.  If negative, the reverse is true.  Gap analysis provides a general measure of interest rate risk butdoes not address complexities such as prepayment risk, interest rate floors andceilings imposed on financial instruments, interest rate dynamics and customers’response to interest rate changes. Currently the Banks' interest sensitivity gap is negative within oneyear.  Assuming that general marketinterest rate changes affected the repricing of assets and liabilities in equalmagnitudes, this indicates that the effects of rising interest rates on theCompany would be a decrease in the net interest margin, whereas fallinginterest rates would cause a corresponding increase in the margin.   

**Interest Rate Gap AnalysisJune 30,2001**

| *(dollars  in thousands)*            | Within One  Year                   |    | After One But  Within Five  Years |   | After Five  Years |    | Total  |   |
|--------------------------------------|------------------------------------|---------|-----------------------------------|--------|-------------------|---------|--------|--------|
|                                 |                               |    |                              |   |              |    |   |   |
| Loans                                | $                                  | 101,879 |                              | $      | 137,899           |    | $      | 38,876 |   | $ | 278,654 |   |
| Debt Securities:                     |                               |    |                              |   |              |    |   |   |
|                                 | Available for sale                 | 2,230   |                              | 9,985  |              | 10,296  |   | 22,511 |   |
|                                 | Held to maturity                   | 170     |                              | 100    |              | 406     |   | 676    |   |
| Interest bearing deposits with banks | 154                                |    | - -                               |   | - -               |    | 154    |   |
|                                 | Total Earning Assets               | $       | 104,433                           |   | $                 | 147,984 |   | $      | 49,578 |   | $ | 301,995 |   |
|                                 |                               |    |                              |   |              |    |   |   |
| Deposits:                            |                               |    |                              |   |              |    |   |   |
|                                 | Savings, NOW and money market      | $       | 113,988                           |   | - -               |    | - -    |   | $ | 113,988 |   |
|                                 | Time deposits                      | 127,875 |                              | $      | 10,245            |    | - -    |   | 138,120 |   |
| Short-term borrowings                | 7,868                              |    | - -                               |   | - -               |    | 7,868  |   |
| Long-term debt                       | 1,214                              |    | - -                               |   | - -               |    | 1,214  |   |
|                                 |                               |    |                              |   |              |    |   |   |
|                                 | Total Interest Bearing Liabilities | $       | 250,945                           |   | $                 | 10,245  |   | - -    |   | $ | 261,190 |   |
|                                 |                               |    |                              |   |              |    |   |   |
|                                 | Net Interest Rate Sensitivity Gap  | $       | (146,512                          | )      | $                 | 137,739 |   | $      | 49,578 |   | $ | 40,805 |   |

The Company’s market risk is impacted by changes in interest rates.  Other types of market risk, such as foreigncurrency exchange rate risk and commodity price risk, do not arise in thenormal course of the Company’s business. The Company has market risk in the form of interest rate risk on itsfinancial assets.  In an effort tounderstand the relative impact of this risk on the Company’s current financialsituation, a processknown as arate shock is applied to the current financial assets.

Rate shock is a process wherein the characteristics of the financialassets of the Company are reviewed in the event they are subjected to aninstantaneous and complete adjustment in the market rate of interest.  These results are modeled to determine theeffects on interest rate margin for the succeeding twelve months from therepricing of variable rate assets and liabilities where applicable.  The level of impact on the various assetsand liabilities are also estimated for their sensitivity to pricing changes ofsuch a market interest rate change. According to this model and its assumptions, the change in net interestmargin in the event market interest rates were to immediately rise or fall by100 basis points is estimated to be $280,000.

CapitalConsolidated capital of FCFG increased $2,181,000 during the first halfof 2001.  The increases comes primarilyfrom net income, which increased capital by $2,063,000.  Capital also increased $439,000 for theafter-tax increase in the securities portfolio.   Payments made on the debt related to the Company’s KSOP plan andthe exercising of stock options added $89,000 and $27,000 respectively.  The reduction of capital was the cashdividends paid of $437,000.  There areregulatory constraints placed upon capital adequacy, and it is necessary tomaintain an appropriate ratio between capital and assets.  Regulations require banks and holdingcompanies to maintain a minimum "leverage" ratio (primary capitalratio) to total assets.  For the mosthighly rated holding companies this ratio must be at least 3%, and for othersit must be 4 to 5%.  At June 30, 2001,the Company's leverage ratio was 8.77**%**,compared to 8.96% at year-end 2000.  Inaddition, banks and holding companies are required to meet minimum risk-basedcapital guidelines under which risk percentages are assigned to variouscategories of assets and off-balance-sheet items to calculate a risk-adjustedcapital ratio.  Tier I capital generallyconsists of common stockholders' equity, less goodwill, while total capitalincludes the allowance for possible credit losses, subject to 1.25% limitationof risk-adjusted assets.  The rulesrequire Tier I capital of 4% of risk-adjusted assets and total capital of8%.  At June 30, 2001, the Tier Icapital ratio was 9.22%, and total capital was 10.30%.  At December 31, 2000 the Tier I capitalratio was 9.24% and the total capital ratio was 10.39%.

**Results of Operations**GeneralNet income for the six months ended June 30, 2001 was $2,063,000,compared to $2,038,000 for the same period in 2000.  This represents a 1.2% increase over the prior year.   Net income for the three months ended June30, 2001 was $992,000, compared to $899,000 for the three months ended June 30,2000.  This represents a 10.3% increasein net income for the period.Net interest income increased $773,000, or 9.1% for the six months ended June30, 2001 over the same period for 2000. Net interest income increased $887,000 for the three months ended June30, 2001.  This represents an increaseof 22.1% over the prior year period. Second quarter improvement in net interest income overcame the decreaseexperienced in the first quarter.  Asignificant reason for this was the presence of a large amount of higher rate,promotional time deposits made during the spring of 2000.  As interest rates dropped rapidly andsignificantly during the first half of 2001, many assets, as well as othervariable deposit rates were reduced, while these time deposits remained attheir contractual rate.  As these timedeposits matured during the second quarter and funds were repriced at lowerrates, the average cost of funds and interest expense rates were reduced to thecomparable market rates that other items had already experienced.  Interest margins have improved over thefirst quarter and, as higher priced time deposits mature, are expected toimprove even further.Interest income for the six months ended June 30, 2001 increased $1,460,000over the six months ended June 30, 2000.Of  this increase, approximately$999,000 is attributed to an increase in the average volume of earningassets.  Average earning assets for thefirst six months of 2001 are $18,871,000, or 6.8%, higher than 2000.  The average rate earned on assets, whichwent to 10.03% from 9.63% for the six month period, increased interest incomeby $461,000. Although the traditional loan portfolio has experienced pressureson the average rate of the portfolio due to interest rate reductions andrepricing as well as competitive environment, the initiation of a small loanprogram in the fourth quarter of 2000 has enabled average rates of returns onloans to remain higher than would normally be the case.  The average balance of such small loansamount to approximately 1.5% of the gross loan portfolio of the Company.  The percentage of average loans to totalaverage earning assets increased to 89.8% from 88.9% in the first half of2000.  The average rate of return onearning assets increased 38 basis points despite pressure on repricing andshort term assets.  Interest income forthe three months ended June 30, 2001 was $947,000 higher than the same periodin the previous year.Total interest expense for the six months ended June 30, 2001 increased$687,000, or 14%, from the comparable period of the prior year.  Of the total increase in interest expense,$889,000 was related to the increased average volume of time deposits, whichincreased $30,263,000 to $142,562,000. Reductions in average borrowings of $9,366,000 reduced interest expenseby $264000.  The average cost of fundsdecreased on the shorter term deposit products and borrowings.  The average cost of time deposit funds roseas the promotional time deposits reached maturity.  The average rate of expense for deposits and borrowings in thefirst half of 2001 increased from 4.29% in 2000 to 4.48%, an increase of 19basis points.  Total interest expensefor the three months ended June 30, 2001 was $60,000 higher than the secondquarter of 2000.Net interest margin, defined as net interest income as a percentage of averageearning assets, increased by 15 basis points to 6.25% from 6.10% in the firsthalf of 2000.

The yield and cost of funds for earning assets and interest bearingliabilities were as follows as of and for the six months ended June 30 (dollarsin thousands):

|                                                            | 2001                                   |     | 2000                      |   |
|-----------------------------------------------------------------|----------------------------------------|----------|---------------------------|--------|
|                                                            | Average Balance                        |     | Interest Income (Expense) |   | Average Rates |   | Average Balance |   | Interest Income (Expense) |   | Average Rates |   |
|                                                            |                                   |     |                      |   |   |   |   |   |   |   |   |   |
| Earning Assets:                                                 |                                   |     |                      |   |   |   |   |   |   |   |   |   |
|                                                            | Loans (Interest and fees)              | $        | 267,710                   |   | $ | 13,924 |   | 10.49 | % | $ | 248,208 |   | $ | 12,389 |   | 10.04 | % |
|                                                            | Federal funds sold                     | 3,717    |                      | 98     |   | 5.32 | % | 2,573 |   | 82 |   | 6.41 | % |
|                                                            | Investment securities                  | 26,697   |                      | 808    |   | 6.10 | % | 28,472 |   | 899 |   | 6.35 | % |
|                                                            |                                   |     |                      |   |   |   |   |   |   |   |   |   |
| Total earning assets and interest income                        | $                                      | 298,1242 |                      | $      | 14,830 |   | 10.03 | % | $ | 279,2530 |   | $ | 13,370 |   | 9.63 | % |
|                                                            | 5322521                                |     |                      |   |   |   | 79561936 |   |   |   |   |   |
|                                                            |                                   |     |                      |   |   |   |   |   |   |   |   |   |
| Interest bearing liabilities:                                   |                                   |     |                      |   |   |   |   |   |   |   |   |   |
|                                                            | Deposits:                              |     |                      |   |   |   |   |   |   |   |   |   |   |
|                                                            | Savings, NOW, andMoney Market Deposits | $        | 102,926                   |   | $ | (1,195 | ) | 2.34 | % | $ | 101,783 |   | $ | (1,221 | ) | 2.41 | % |
|                                                            | Time deposits                          | 142,562  |                      | (4,230 | ) | 5.98 | % | 112,300 |   | (3,148 | ) | 5.64 | % |
|                                                            |                                   |     |                      |   |   |   |   |   |   |   |   |   |   |
| Total interest bearing deposits                                 | $                                      | 245,488  |                      | (5,425 | ) | 4.46 | % | $ | 214,083 |   | (4,369 | ) | 4.10 | % |
| Other borrowings                                                | 6,314                                  |     | (164                      | )      | 5.24 | % | 15,680 |   | (533 | ) | 6.84 | % |
| Total interest bearing liabilities                              |                                   |     |                      |   |   |   |   |   |   |   |   |   |
| Total interest bearing liabilities and  interest expense        | $                                      | 251,8027 |                      | $      | (5,589 | ) | 4.48 | % | $ | 229,7634 |   | $ | (4,902 | ) | 4.29 | % |
|                                                            | 6309025                                |     |                      |   |   |   | 7383842 |   |   |   |   |   |
| Net interest income                                             |                                   |     | $                         | 9,241  |   |   |   |   |   | $ | 8,468 |   |   |   |
|                                                            |                                   |     |                           |   |   |   |   |   |  |   |   |   |
| Net interest margin as a percent percentage of  average assets: |                                   |     |                      |   | 6.25 | % |   |   |   |   | 6.10 | % |
|                                                                 |                                        |          |                           |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

An analysis of the change in net interest income is as follows for thesix months ended June 30 (dollars in thousands):

|                | 2001 compared  to 2000                   |   |
|---------------------|------------------------------------------|--------|
|                | Increase  (decrease) due to              |   |
|                | Volume                                   |   | Rate |   | Net |   |
|                |                                     |   |   |   |   |   |
| Interest earned on: |                                     |   |   |   |   |   |
|                | Loans                                    | $      | 1,000 |   | $ | 535 |   | $ | 1,535 |   |
|                | Federal funds sold and deposits in banks | 54     |   | (40 | ) | 14 |   |
|                | Investment securities                    | (55    | ) | (34 | ) | (89 | ) |
|                | Total interest income                    | 999    |   | 461 |   | 1,460 |   |
|                |                                     |   |   |   |   |   |
| Interest paid on:   |                                     |   |   |   |   |   |
|                | Savings, NOW and MMA                     | 13     |   | (39 | ) | (26 | ) |
|                | Time deposits                            | 889    |   | 193 |   | 1,082 |   |
|                | Other borrowings                         | (264   | ) | (105 | ) | (369 | ) |
|                | Total Interest expense                   | 638    |   | 49 |   | 687 |   |
|                |                                     |   |   |   |   |   |   |
|                | Net interest income                      | $      | 361 |   | $ | 412 |   | $ | 773 |   |
|                     |                                          |        |  |  |  |  |  |  |  |  |  |

The change ininterest due to both rate and volume has been allocated to volume and ratechanges in proportion to the relationship of the absolute dollar amounts of thechange in each.

 

Non-interestincome increased by $343,000, or 14.0%, from the first half of 2000.  Origination fees on mortgage loans,reflecting the demand for new and refinanced mortgages generated by the largeand rapid reduction in interest rates, more than double over the same period a yearearlier to $901,000 vs. $441,000.  Othernon-interest income, when factoring out a $198,000 gain on sale of assets in2000, actually increased by $103,00 over the prior year.  There were no comparable assets sales duringthe first half of 2001.  Non-interestincome for the three months ended June 30, 2001 also benefited from increasemortgage loan activity.  Totalnon-interest income increased $128,000, or 11.0% over the prior year.

Non-interestexpenses for the first half of 2001 increased by $756,000, or 20.3%, over thefirst half of 2000.  Compensationexpense increased $386,000, or 9.2% as a result of two primary factors.  The first factor is the increased commissioncompensation related to the large increase in origination fees on mortgageloans discussed above.  Additionally,three new branches opened in the first half of 2001 and added staff that hadnot been employed during the same period of 2000.  The occupancy increase of $112,000 is also related to theadditional branch locations.  The other expensesincrease of $561,000 included an additional $149,000 in marketing expensesrelated to the additional branch openings. Supply expenses increased $86,000 over prior year due to initialstocking of the new branches as well as a large order of consumablesupplies.  The initiation of the smallloan program has generated additional operating costs not present in 2000.  Increases have been experienced in businessand occupation taxes of $124,000, credit report expenses of $40,000 andcorrespondent bank fees of $24,000. Expenses related to foreclosed real estate has increased $96,000 overthe same time period in 2000.  Thesecond quarter increase in non-interest expense of $756,000 is a due to thereasons detailed for the first half increase as well.  The ratio of non-interest expense to average assets increasedfrom 4.89% for the six months ended June 30, 2000 to 5.07% in 2001.  The ratio of net overhead (non-interestexpense minus non-interest income) divided by average total assets increasedfrom 3.30% for the six months ended June 30, 2000 to 3.42% for the same periodin 2001.

 

| **First  Community Financial Group, Inc.**                                                                                                   |
|----------------------------------------------------------------------------------------------------------------------------------------------|
| **PART II - OTHER INFORMATION**                                                                                                              |
| **Item  4 – Submission of Matters to Vote of Security Holders**                                                                         |
| On May 3, 2001, the  Company held its 2001 Annual Shareholders' Meeting.                                                                     |
| One member of the  Company's Board of Directors were re-elected with 1,723,887 shares being  cast.  The voting details are as  follows: |
| A. Richard Panowicz                                                                                                                          | 1,712,179 FOR | 11,708 WITHHELD |
| The terms for this  Director will expire in 2004.  Other  continuing Directors and their terms are:                                     |
| E. Paul DeTray                                                                                                                               | Term expires 2002 |   |
| Michael N. Murphy                                                                                                                            | Term expires 2002 |   |
| Patrick L. Martin                                                                                                                            | Term expires 2003 |   |
| Ken F. Parsons                                                                                                                               | Term expires 2003 |   |

 

**First Community Financial Group, Inc.**

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.

|                   | FIRST COMMUNITY  FINANCIAL GROUP, INC. |
|------------------------|----------------------------------------|
|                   |                                   |
|                   | (Registrant)                           |
|                   |                                   |   |
|                   |                                   |   |
|                   |                                   |   |
| Date: August 14,  2001 | By:                                    | /s/ Ken F. Parsons |
|                   |                                   | Ken F. Parsons |
|                   |                                   | President, Chief  Executive Officer |
|                   |                                   |   |
|                   |                                   |   |
|                   |                                   |   |
|                   | By:                                    | /s/ James F.  Arneson |
|                   |                                   | James F. Arneson |
|                   |                                   | Executive Vice  President, |
|                   |                                   | Chief Financial  Officer |
|                   |                                   | (Principal  Accounting Officer) |