**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-Q**

 

**(markone)**

**ý****QUARTERLY REPORT UNDERSECTION 13 OR 15(d)**

**OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**Forthe quarterly period ended March 31, 2002**

 

**OR**

 

**o****TRANSITION REPORT UNDERSECTION 13 or 15(d)**

**OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**Forthe transition period from              to              **

 

**CommissionFile Number     0-24024**

 

**First Community 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)                          |
|                                                               |   |                                  |
| Issuer’s  telephone number: **(360) 459-1100**                |

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12months (or for such shorter periods that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days:

 

Yes ý   No o

 

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

 
| **Title of Class** |   | **Outstanding at March 31, 2002** |
|--------------------|--------|-----------------------------------|
| Common Stock       |   | 2,188,497                         |

 

 

----

 

**First Community 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  Consolidates 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 |
|                            |   |
| PART II - OTHER INFORMATION     |
|                            |   |
| Item 6                          | Exhibits and  Reports on Form 8-K |
|                            |   |
| SIGNATURES                      |   |

 

2

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

Condensed ConsolidatedBalance Sheets (Unaudited)

 

*(Dollars in thousands)*

 
|                                                                                                                                            |   | **March 31  2002** |        | **December  31  2001** |       |
|-------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------|-------------|------------------------|------------|
| **Assets**                                                                                                                                      |   |               |        |                   |       |
| Cash  and due from banks                                                                                                                        |   | $                  | 29,598      |                   | $          | 21,383 |   |
| Interest  bearing deposits in banks                                                                                                             |   | 63                 |        | 74                     |       |
| Securities  available for sale                                                                                                                  |   | 19,425             |        | 18,104                 |       |
| Securities  held to maturity                                                                                                                    |   | 505                |        | 506                    |       |
| FHLB  Stock                                                                                                                                     |   | 2,016              |        | 1,985                  |       |
| Loans  held for sale                                                                                                                            |   | 4,871              |        | 6,196                  |       |
|                                                                                                                                            |   |               |        |                   |       |
| Loans                                                                                                                                           |   | 287,631            |        | 288,701                |       |
| Allowance  for credit losses                                                                                                                    |   | 4,396              |        | 4,088                  |       |
| **Net  loans**                                                                                                                                  |   | **283,235**        | ** **  | **284,613**            | ** ** |
|                                                                                                                                            |   |               |        |                   |       |
| Premises  and equipment                                                                                                                         |   | 10,166             |        | 10,382                 |       |
| Foreclosed  real estate                                                                                                                         |   | 5,111              |        | 4,387                  |       |
| Accrued  interest receivable                                                                                                                    |   | 1,530              |        | 1,471                  |       |
| Cash  value of life insurance                                                                                                                   |   | 8,450              |        | 8,453                  |       |
| Intangible  assets                                                                                                                              |   | 6,218              |        | 6,268                  |       |
| Other  assets                                                                                                                                   |   | 913                |        | 801                    |       |
|                                                                                                                                            |   |               |        |                   |       |
| **Total  assets**                                                                                                                               |   | **$**              | **372,101** | ** **             | **$**      | **364,623** | ** ** |
|                                                                                                                                            |   |               |        |                   |       |
| **Liabilities**                                                                                                                                 |   |               |        |                   |       |
| Deposits:                                                                                                                                       |   |               |        |                   |       |
| Demand                                                                                                                                          |   | $                  | 53,162      |                   | $          | 55,013 |   |
| Savings  and interest bearing demand                                                                                                            |   | 133,708            |        | 123,093                |       |
| Time  deposits                                                                                                                                  |   | 123,451            |        | 135,624                |       |
| **Total  deposits**                                                                                                                             |   | **310,321**        | ** **  | **313,730**            | ** ** |
|                                                                                                                                            |   |               |        |                   |       |
| Federal  funds purchased                                                                                                                        |   | 9,200              |        | 1,400                  |       |
| Short  term borrowing                                                                                                                           |   | 8,142              |        | 5,655                  |       |
| Long  term debt                                                                                                                                 |   | 550                |        | 575                    |       |
| Accrued  interest payable                                                                                                                       |   | 248                |        | 364                    |       |
| Other  liabilities                                                                                                                              |   | 3,940              |        | 4,104                  |       |
| **Total  liabilities**                                                                                                                          |   | **332,401**        | ** **  | **325,828**            | ** ** |
|                                                                                                                                            |   |               |        |                   |       |
| **Stockholders’  Equity**                                                                                                                  |   |               |        |                   |       |
| Common  stock, par value $2.50 per share;   10,000,000 shares authorized, 2,188,497 shares issued  in 2002, and 2,186,681 shares issued in 2001 |   | 5,471              |        | 5,467                  |       |
| Additional  paid-in capital                                                                                                                     |   | 23,142             |        | 23,129                 |       |
| Retained  earnings                                                                                                                              |   | 11,039             |        | 9,912                  |       |
| Accumulated  other comprehensive income                                                                                                         |   | 48                 |        | 312                    |       |
| Unearned  KSOP shares                                                                                                                           |   | 0                  |        | (25                    | )          |
| **Total  stockholders’ equity**                                                                                                            |   | **39,700**         | ** **  | **38,795**             | ** ** |
|                                                                                                                                            |   |               |        |                   |       |
| **Total  liabilities and stockholders’ equity**                                                                                            |   | **$**              | **372,101** | ** **             | **$**      | **364,623** | ** ** |

 

*See notes to condensed consolidated financial statements*

 

3

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

Condensed ConsolidatedStatements of Income and Comprehensive Income (Unaudited)

 

*(Dollars in thousands, except per share amounts)*

 
|                                                                                    |   | **Three  months ended  March 31** |       |
|-----------------------------------------------------------------------------------------|--------|-----------------------------------|------------|
|                                                                                    |   | **2002**                          |       | **2001** |   |
| **Interest  income**                                                                    |   |                              |       |   |   |
| Loans                                                                                   |   | $                                 | 6,629      |   | $ | 6,702 |   |
| Federal  funds sold and deposits in banks                                               |   | 2                                 |       | 56 |   |
| Investments                                                                             |   | 305                               |       | 408 |   |
|                                                                                    |   |                              |       |   |   |
| **Total  interest income**                                                              |   | **6,936**                         | ** ** | **7,166** |   |
|                                                                                    |   |                              |       |   |   |
| **Interest  Expense**                                                                   |   |                              |       |   |   |
| Deposits                                                                                |   | 1,645                             |       | 2,777 |   |
| Other                                                                                   |   | 71                                |       | 57 |   |
|                                                                                    |   |                              |       |   |   |
| **Total  interest expense**                                                             |   | **1,716**                         | ** ** | **2,834** |   |
|                                                                                    |   |                              |       |   |   |
| **Net  interest income**                                                                |   | **5,220**                         | ** ** | **4,332** |   |
|                                                                                    |   |                              |       |   |   |
| **Provision  for credit losses**                                                        |   | **621**                           | ** ** | **145** |   |
|                                                                                    |   |                              |       |   |   |
| **Net  interest income after provision for credit losses**                              |   | **4,599**                         | ** ** | **4,187** |   |
|                                                                                    |   |                              |       |   |   |
| **Non-interest  income**                                                                |   |                              |       |   |   |
| Service  charges on deposit accounts                                                    |   | 723                               |       | 458 |   |
| Origination  fees on mortgage loans sold                                                |   | 557                               |       | 426 |   |
| Other  operating income                                                                 |   | 536                               |       | 607 |   |
|                                                                                    |   |                              |       |   |   |
| **Total  non-interest income**                                                          |   | **1,816**                         | ** ** | **1,491** |   |
|                                                                                    |   |                              |       |   |   |
| **Non-interest  expense**                                                               |   |                              |       |   |   |
| Salaries  and employee benefits                                                         |   | 2,265                             |       | 2,199 |   |
| Occupancy  and equipment                                                                |   | 642                               |       | 567 |   |
| Amortization  of goodwill and other intangible assets                                   |   | 67                                |       | 136 |   |
| Other  expense                                                                          |   | 1,485                             |       | 1,217 |   |
|                                                                                    |   |                              |       |   |   |
| **Total  non-interest expense**                                                         |   | **4,459**                         | ** ** | **4,119** |   |
|                                                                                    |   |                              |       |   |   |
| **Operating  income before income taxes**                                               |   | **1,956**                         | ** ** | **1,559** |   |
| Income  Taxes                                                                           |   | 610                               |       | 488 |   |
|                                                                                    |   |                              |       |   |   |
| **Net  income**                                                                         |   | **$**                             | **1,346**  | ** ** | **$** | **1,071** |   |
|                                                                                    |   |                              |       |   |   |
| **Other  comprehensive income, net of tax:**                                            |   |                              |       |   |   |
| Unrealized  holding gains (losses) on securities arising during the period              |   | (264                              | )          | 490 |   |
|                                                                                    |   |                              |       |   |   |
| **Comprehensive  Income**                                                               |   | **$**                             | **1,082**  | ** ** | **$** | **1,561** |   |
|                                                                                    |   |                              |       |   |   |
| **Earnings  Per Share Data**                                                            |   |                              | ** ** |   | ** ** |
| **Basic  earnings per share**                                                           |   | **$**                             | **.62**    | ** ** | **$** | **.49** | ** ** |
| **Diluted  earnings per share**                                                         |   | **$**                             | **.60**    | ** ** | **$** | **.48** | ** ** |
|                                                                                    |   |                              |       |   |   |
| Dividends  declared per share                                                           |   | $                                 | .10        |   | $ | .10 |   |
|                                                                                    |   |                              |       |   |   |
| Weighted  average number of common shares outstanding                                   |   | 2,187,093                         |       | 2,175,130 |   |
| Weighted  average number of common shares outstanding, Including dilutive stock options |   | 2,239,701                         |       | 2,218,499 |   |
|                                                                                    |   |                              |       |   |   |
| Return on  average assets                                                               |   | 1.46                              | %          | 1.29 | % |

 

*See notes to condensed consolidated financial statements*

 

4

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

Condensed ConsolidatedStatements of Stockholders’ Equity (Unaudited)

 

*(Dollars in thousands)*

 
|                                 |   | **Three Months Ended March 31, 2001 and 2002** |      |
|--------------------------------------|--------|------------------------------------------------|-----------|
|                                 |   | **Common  Stock**                              |      | **Additional  Paid-in  Capital** |   | **Retained  Earnings** |   | **Accumulated  Other  Comprehensive  Income (Loss)** |   | **Unearned  KSOP  Shares** |   | **Total** |   |
|                                 |   |                                           |      |   |   |   |   |   |   |   |   |   |   |
| Balance,  December 31,  2000    |   | $                                              | 5,460     |   | $ | 23,099 |   | $ | 6,349 |   | $ | (332 | ) | $ | (203 | ) | $ | 34,373 |   |
|                                 |   |                                           |      |   |   |   |   |   |   |   |   |   |   |
| Net  income                          |   | —                                         |      | — |   | 1,071 |   | — |   | — |   | 1,071 |   |
|                                 |   |                                           |      |   |   |   |   |   |   |   |   |   |   |
| Stock  options exercised             |   | 7                                              |      | 20 |   | — |   | — |   | — |   | 27 |   |
|                                 |   |                                           |      |   |   |   |   |   |   |   |   |   |   |
| Cash  dividend ($0.10 per share)     |   | —                                         |      | — |   | (219 | ) | — |   | — |   | (219 | ) |
|                                 |   |                                           |      |   |   |   |   |   |   |   |   |   |   |
| Other  comprehensive income          |   | —                                         |      | — |   | — |   | 490 |   | — |   | 490 |   |
|                                 |   |                                           |      |   |   |   |   |   |   |   |   |   |   |
| Net decrease in unearned KSOP shares |   | *—*                                       | * *  | *—* | * * | *—* | * * | *—* |   | 45 |   | 45 |   |
|                                 |   |                                           |      |   |   |   |   |   |   |   |   |   |   |
| **Balance,****March 31, 2001**       |   | **$**                                          | **5,467** | ** ** | **$** | **23,119** | ** ** | **$** | **7,201** | ** ** | **$** | **158** | ** ** | **$** | **(158** | **)** | **$** | **35,787** | ** ** |
|                                 |   |                                           |      |   |   |   |   |   |   |   |   |   |   |
| **Balance,  December 31, 2001**      |   | **$**                                          | **5,467** | ** ** | **$** | **23,129** | ** ** | **$** | **9,912** | ** ** | **$** | **312** | ** ** | **$** | **(25** | **)** | **$** | **38,795** | ** ** |
|                                 |   |                                           |      |   |   |   |   |   |   |   |   |   |   |
| Net income                           |   | —                                         |      | — |   | 1,346 |   | — |   | — |   | 1,346 |   |
|                                 |   |                                           |      |   |   |   |   |   |   |   |   |   |   |
| Stock  options exercised             |   | 4                                              |      | 13 |   | — |   | — |   | — |   | 17 |   |
|                                 |   |                                           |      |   |   |   |   |   |   |   |   |   |   |
| Cash  dividend ($0.10 per share)     |   | —                                         |      | — |   | (219 | ) | — |   | — |   | (219 | ) |
|                                 |   |                                           |      |   |   |   |   |   |   |   |   |   |   |
| Other  comprehensive loss            |   | —                                         |      | — |   | — |   | (264 | ) | — |   | (264 | ) |
|                                 |   |                                           |      |   |   |   |   |   |   |   |   |   |   |
| Net decrease in unearned KSOP shares |   | *—*                                       |      | — |   | — |   | — |   | 25 |   | 25 |   |
|                                 |   |                                           |      |   |   |   |   |   |   |   |   |   |   |
| **Balance****, March 31, 2002**      |   | **$**                                          | **5,471** | ** ** | **$** | **23,142** | ** ** | **$** | **11,039** | ** ** | **$** | **48** | ** ** | **$** | **0** | ** ** | **$** | **39,700** | ** ** |

 

*See notes to condensed consolidated financial statements*

 

5

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

Condensed ConsolidatedStatements of Cash Flows (Unaudited)

 

*(Dollars in thousands)*

 
|                                                                               |   | **Three  months Ended  March 31** |       |
|------------------------------------------------------------------------------------|--------|-----------------------------------|------------|
|                                                                               |   | **2002**                          |       | **2001** |   |
| **Cash  Flows from Operating Activities**                                          |   |                              |       |   |   |
| Net  Income                                                                        |   | $                                 | 1,346      |   | $ | 1,071 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |   |                              |       |   |   |
| Provision  for credit losses                                                       |   | 621                               |       | 145 |   |
| Depreciation  and amortization                                                     |   | 302                               |       | 266 |   |
| Amortization  of other intangible assets                                           |   | 50                                |       | 103 |   |
| Other  — net                                                                  |   | (1,077                            | )          | 1,472 |   |
| Originations of  loans held for sale                                               |   | (22,667                           | )          | (18,157 | ) |
| Proceeds from  sales of loans held for sale                                        |   | 23,992                            |       | 15,782 |   |
| **Net cash provided by operating  activities**                                     |   | **2,567**                         | ** ** | **682** |   |
|                                                                               |   |                              |       |   |   |
| **Cash  Flows from Investing Activities**                                          |   |                              |       |   |   |
| Net (increase)  decrease in interest bearing deposits in banks                     |   | 11                                |       | (5 | ) |
| Net increase in  Federal funds sold                                                |   | 0                                 |       | (12,860 | ) |
| Proceeds from  maturities and prepayments of available-for-sale securities         |   | 739                               |       | 1004 |   |
| Purchase of  securities available for sale                                         |   | (2,424                            | )          | 0 |   |
| Net (increase)  decrease in loans                                                  |   | 757                               |       | (5,289 | ) |
| Additions to  premises and equipment                                               |   | (86                               | )          | (502 | ) |
| **Net  cash used by investing activities**                                         |   | **(1,003**                        | **)**      | **(17,652** | ) |
|                                                                               |   |                              |       |   |   |
| **Cash  Flows from Financing Activities**                                          |   |                              |       |   |   |
| Net increase  (decrease) in deposits                                               |   | (3,409                            | )          | 33,124 |   |
| Net increase  (decrease) in short-term borrowings                                  |   | 10,287                            |       | (13,352 | ) |
| Sale of common  stock                                                              |   | 17                                |       | 27 |   |
| Repayment of  long-term borrowings                                                 |   | (25                               | )          | (45 | ) |
| Payment of cash  dividends                                                         |   | (219                              | )          | (219 | ) |
| **Net  cash provided by financing activities**                                     |   | **6,651**                         | ** ** | **19,535** |   |
|                                                                               |   |                              |       |   |   |
| **Net change in cash and due from  banks**                                         |   | **8,215**                         | ** ** | **2,565** |   |
|                                                                               |   |                              |       |   |   |
| **Cash  and Due from Banks:**                                                      |   |                              |       |   |   |
| Beginning of  period                                                               |   | 21,383                            |       | 12,640 |   |
|                                                                               |   |                              |       |   |   |
| **End of period**                                                                  |   | **$**                             | **29,598** | ** ** | **$** | **15,205** |   |
|                                                                               |   |                              |       |   |   |
| **Supplemental  Disclosures of Cash Flow Information:**                            |   |                              |       |   |   |
| **Cash****payments  for:**                                                         |   |                              |       |   |   |
| Interest                                                                           |   | $                                 | 1,832      |   | $ | 2,790 |   |
| Taxes                                                                              |   | 200                               |       | 0 |   |
|                                                                               |   |                              |       |   |   |
| **Supplemental  Disclosures of Non-Cash Investing and Financing Activities:**      |   |                              |       |   |   |
| Decrease in  unearned KSOP shares                                                  |   | (25                               | )          | (45 | ) |
| Fair value  adjustment of securities available for sale, net                       |   | (264                              | )          | 490 |   |

 

*See notes to condensed consolidated financial statements*

 

6

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

Notes to ConsolidatedFinancial 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 three months ended March 31, 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 reported 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 the reportingperiod.  Actual results could differfrom those estimates.

 

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

 

Basic and diluted earnings per share are calculated by dividing netincome by the weighted average number of common shares outstanding during theperiods presented.  Diluted earnings pershare assumes that all dilutive stock options outstanding are issued such thattheir dilutive effect is maximized.

 
|                                                           |   | **Three  Months Ended March 31,** |      |
|----------------------------------------------------------------|--------|-----------------------------------|-----------|
|                                                           |   | **2002**                          |      | **2001** |   |
|                                                           |   |                              |      |   |   |
| Basic  EPS computation Numerator — Net Income             |   | $                                 | 1,346,000 |   | $ | 1,071,000 |   |
|                                                           |   |                              |      |   |   |
| Denominator  — Weighted Average common shares outstanding |   | 2,187,093                         |      | 2,175,130 |   |
|                                                           |   |                              |      |   |   |
| Basic  EPS                                                     |   | $                                 | .62       |   | $ | .49 |   |
|                                                           |   |                              |      |   |   |
| Diluted  EPS computation Numerator — Net Income           |   | $                                 | 1,346,000 |   | $ | 1,071,000 |   |
|                                                           |   |                              |      |   |   |
| Denominator  — Weighted average common shares outstanding |   | 2,187,093                         |      | 2,175,130 |   |
|                                                           |   |                              |      |   |   |
| Effect  of dilutive stock options                              |   | 49,914                            |      | 43,369 |   |
|                                                           |   |                              |      |   |   |
| Weighted  average common shares and common stock equivalents   |   | 2,237,007                         |      | 2,218,499 |   |
|                                                           |   |                              |      |   |   |
| Diluted  EPS                                                   |   | $                                 | .60       |   | $ | .48 |   |

 

7

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

 

The Financial AccountingStandards Board adopted Financial Accounting Standards No. 141, BusinessCombinations, and 142, Goodwill and Other Intangible Assets, in 2001.  SFAS No. 141 requires that all businesscombinations entered into after June 30, 2001 be accounted for under thepurchase method.  SFAS No. 142 addresseshow goodwill and other intangible assets should be accounted for after theyhave been initially recorded in the financial statements.  Goodwill arising from business combinationsprior to the effective date of this standard will no longer be amortized,starting in 2002, but will be subject to annual tests for impairment.  In accordance with the provisions of SFASNo. 142, the Company plans to complete its transitional assessment of goodwillimpairment before June 30, 2002.  Otheridentifiable intangible assets, and certain unidentifiable intangible assetsarising from certain acquisitions, will continue to be amortized using the samelives and methods.  The Company has$4,159,000 of goodwill on which amortization has ceased effective January 1,2002 which resulted in a reduction of amortization expense of $69,000 in thequarter ended March 31, 2002.  Theremaining intangible assets of $2,059,000 will continue to be amortized.

 

In June 2001, the FASBalso issued SFAS No. 143, *Accounting forAsset Retirement Obligations*. This statement addresses financial accounting and reporting obligationsassociated with the retirement of tangible long-lived assets and the associatedannual retirement costs.  This statementis effective for all fiscal years beginning after June 15, 2002.  In August 2001 the FASB issued SFAS No. 144,*Accounting for the Impairment or Disposal ofLong-Lived Assets*.  Thestatement addresses financial accounting and reporting for the impairment ordisposal of long-lived assets.  Thisstatement is effective for fiscal years beginning after December 15, 2001.  The Company does not anticipate that theadoption of SFAS Nos. 143 and 144 will have a material effect on its financialposition or results of operations.

 

8

----

 

**Management’s Discussion and Analysisof Financial Condition and Results of Operations**

 

This discussion contains certain forward-looking statements within themeaning of the federal securities laws. Actual results and the timing of certain events could differ materiallyfrom those projected in the forward-looking statements due to a number offactors.

 

**Financial Condition**

 

Overview

 

The Company’s consolidated total assets at March 31, 2002 of$372,101,000 represents a 2.1% increase over December 31, 2001 assets of$364,623,000.  The growth in assets wasprimarily in cash in banks, which is used to satisfy regulatory requirements aswell as provide the operational funding of the Company’s small loanprogram.  Loan balances, net ofallowance for credit losses, decreased $2,703,000, or 1.0%, in the firstquarter to $288,106,000 from $290,809,000 at December 31, 2001.  The composition of the loan portfolio atMarch, 2002 and December 31, 2001 follows (dollars in thousands):

 
|         |   | **March 31,  2002** |        | **December  31,  2001** |   |
|--------------|--------|---------------------|-------------|-------------------------|--------|
|         |   |                |        |                    |   |
| Commercial   |   | $                   | 40,854      |                    | $      | 40,870 |   |
|         |   |                |        |                    |   |
| Real  Estate |   |                |        |                    |   |
|         |   |                |        |                    |   |
| Mortgage     |   | 179,476             |        | 185,012                 |   |
|         |   |                |        |                    |   |
| Construction |   | 54,798              |        | 50,798                  |   |
|         |   |                |        |                    |   |
| Consumer     |   | 7,380               |        | 4,732                   |   |
|         |   |                |        |                    |   |
| Small  Loans |   | 5,123               |        | 7,289                   |   |
|         |   |                |        |                    |   |
|         |   | **$**               | **287,631** |                    | **$**  | **288,701** |   |

 

The total of non-performing loans (non-accrual and loans over 90 dayspast due) has increased since December 31, 2001, as shown in the followingtable of non-performing assets (dollars in thousands):

 
|                                     |   | **March 31,2002** |      | **December  31,2001** |   |
|------------------------------------------|--------|-------------------|-----------|-----------------------|--------|
|                                     |   |              |      |                  |   |
| Non-accrual  loans                       |   | $                 | 1,052     |                  | $      | 1,830 |   |
| Accruing  loans past due 90 days or more |   | 439               |      | 284                   |   |
| Foreclosed  real estate                  |   | 5,111             |      | 4,387                 |   |
| Other  assets                            |   | 2                 |      | 7                     |   |
|                                     |   | **$**             | **6,604** |                  | **$**  | **6,508** |   |

 

Non-accrual loansdecreased by $778,000 during the first quarter of 2002.  Accruing loans past due 90 days or moreincreased $155,000 over the same period. Loans in this category must be well secured and in the process ofcollection for the accrual of interest to continue.  These loans are monitored and may be reclassified as non-accrualas conditions warrant. ** **Foreclosedreal estate has increased by $724,000 from prior year end.  The percentage of non-performing loans tototal loans decreased to 0.52% from 0.73% at December 31, 2001.

 

The allowance for creditlosses reflects management’s current estimate of the amount required to absorblosses 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 economic conditions.  All loans in the portfolio are assigned agrade indicating credit quality by the originating loan officer at the time ofloan origination.  These grades arereviewed at regular intervals and, if performance concerns arise on anindividual loan, the grade is lowered to the appropriate level.  Management reviews the composite changes inloan grades within the portfolio in its assessment of the adequacy of theallowance.  If a loan becomes impaired,the Company’s loss exposure on that loan is measured based on expected cashflows or collateral values, and if necessary, a portion of the allowance forcredit losses is allocated to that loan.  After reviewing the composition of the loan portfolio at March 31, 2002,the levels of classified loans, losses experienced during the period, and thechanges in the economy, management has determined the allowance for creditlosses to

 

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be adequate to cover theloss exposure in the loan portfolio at that date.  An analysis of the adequacy of the allowance is subject toquarterly review by the Board of Directors.

 

The allowance for creditlosses increased $308,000 in the first quarter of 2002.  The ratio of allowance for credit losses tototal loans increased during the first quarter of 2002 to 1.53% from 1.42% atDecember 31, 2001.  The dollar valuechange in the allowance consisted of $621,000 of provision less $313,000 in netcharge-offs of loans.  Charge-offs wereconcentrated in the Company’s small loan portfolio.  The allowance for credit losses increased even though the loanquality improved as a ratio of non-performing loans to total loans.  This is not the result of any identifiedproblem with the loan portfolio, rather it is a general allowance to theeconomic conditions that continue to persist in the national economy.  While there are increasing signs of economicrecovery, they have been inconsistent, and recovery has been slow.  The Company considers the level of theallowance for credit losses to be adequate given current level of loanportfolio quality and prevailing economic conditions.

 

Investment securitiesincreased by $1,320,000, or 7.1% during the first quarter of 2002 to a total of$19,930,000.    Additional securitieswere purchased during the quarter primarily as a source of collateral for theCompany’s operations.

 

Total deposits decreased $3,409,000, or 1.1% in the three months endedMarch 31, 2002 to $310,321,000.  The mixof deposits shifted toward transaction accounts during the quarter, withincreases shown in savings and interest-bearing deposits and a correspondingdecrease in time deposits.  Short termborrowings have also been used as a funding source due to their relatively lowcost as compared to time deposits.  Fedfunds purchased and short term borrowings increased during the quarter by$10,287,000 to $17,342,000 due to their favorable cost compared to rates paidon deposits.

 

Liquidity, RateSensitivity and Market Risk

 

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.

 

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 overnight investmentsin interest bearing deposits in banks and federal funds sold and investmentsecurities, particularly those of shorter maturity, and are the principalsource of asset liquidity.  At March 31,2002, cash, deposits in banks, federal funds sold and securities available forsale totaled $49,086,000.  Externalsources refer to the ability to attract new liabilities and capital.  They include increasing savings and demanddeposits, federal funds purchased, borrowings and the issuance of capital anddebt securities.  At March 31, 2002,borrowing lines of credit totaled $44,210,000. These credit facilities are being used regularly as a source of funds.At March 31, 2002, $17,342,000 was borrowed against these lines of credit inthe form of federal funds purchased and term advances.

 

Management believes theBank’s liquidity position at March 31, 2002, was adequate to meet its shortterm funding requirements.

 

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 which matures, or is subject to repricing 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 assetsreprice 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 repricing 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.

 

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**Interest Rate Gap AnalysisMarch 31, 2002**

** **
| ***(dollars in  thousands)***         |   | **Within  One Year** |           | **After One  But Within  Five Years** |   | **After  Five Years** |   | **Total** |    |
|---------------------------------------|--------|----------------------|----------------|---------------------------------------|--------|-----------------------|--------|-----------|---------|
|                                  |   |                 |           |                                  |   |                  |   |      |    |
| Loans                                 |   | $                    | 120,391        |                                  | $      | 139,308               |   | $         | 27,932  |   | $ | 287,631 |   |
| Securities:                           |   |                 |           |                                  |   |                  |   |      |    |
| Available  for sale                   |   | 4,119                |           | 7,134                                 |   | 8,172                 |   | 19,425    |    |
| Held  to maturity                     |   | —               |           | 505                                   |   | —                |   | 505       |    |
| Interest  bearing deposits with banks |   | 63                   |           | —                                |   | —                |   | 63        |    |
| Total  Earning Assets                 |   | $                    | 124,573        |                                  | $      | 146,947               |   | $         | 36,104  |   | $ | 307,624 |   |
|                                  |   |                 |           |                                  |   |                  |   |      |    |
| Deposits:                             |   |                 |           |                                  |   |                  |   |      |    |
| Savings,  NOW and money market        |   | $                    | 133,708        |                                  | — |                  | — |      | $       | 133,708 |   |
| Time  deposits                        |   | 114,491              |           | $                                     | 8,960  |                  | — |      | 123,451 |   |
| Short-term  borrowings                |   | 17,342               |           | —                                |   | —                |   | 17,342    |    |
| Long-term  debt                       |   | 550                  |           | —                                |   | —                |   | 550       |    |
|                                  |   |                 |           |                                  |   |                  |   |      |    |
| Total  Interest Bearing Liabilities   |   | $                    | 266,091        |                                  | $      | 8,960                 |   | —    |    | $ | 275,051 |   |
|                                  |   |                 |           |                                  |   |                  |   |      |    |
| Net  Interest Rate Sensitivity Gap    |   | $                    |  (141,518 | )                                     | $      | 137,987               |   | $         | 36,104  |   | $ | 32,573 |   |

 

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’s business.

 

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 process****knownas a rate shock is applied to the current financial assets.

 

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 repricing of variable rate assets andliabilities where applicable.  The levelof impact on the various assets and liabilities are also estimated for their sensitivityto 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 $480,000.  This amountrepresents approximately 2.3% of the annualized net interest income for 2002.

 

 

Capital

 

Consolidated capital ofFCFG increased $905,000 during the first quarter of 2002.  The net income for the first quarter and itscorresponding increase to retained earnings was the primary component of thisincrease.  Capital decreases were theresult of the quarterly cash dividend paid to shareholders in the amount of$219,000 and a reduction in the**market value of securities available forsale of  $264,000 on an after-tax basis.

 

There are regulatory constraints placed upon capital adequacy, and itis necessary to maintain an appropriate ratio between capital and assets.  Regulations require banks and holdingcompanies to maintain a minimum “leverage” ratio (primary capital ratio) oftotal assets.  For the most highly ratedholding companies this ratio must be at least 3%, and for others it must be 4to 5%.  At March 31, 2002, the Company’sleverage ratio was 9.21%, 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 March 31, 2002, the Company’s Tier I capital ratio was 9.66%, andtotal capital was 10.91%.  At December31, 2001 the Company’s Tier I capital ratio was 9.34% and the total capitalratio was 10.52%.

 

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**Results of Operations**

General

 

Net income for the threemonths ended March 31, 2002 was $1,346,000, compared to $1,071,000 for thethree months ended March 31, 2001.

 

Net interest incomeincreased $888,000, an increase of 20.5% for the three months ended March 31,2002 over the same period for 2001.  Theincrease in the Company’s net interest income is primarily the result of thereduction in interest rates, and corresponding reduction in cost of funds.  The Company’s small loan product also had asignificant impact on the growth in net interest income for the quarter due tothe expansion since the first quarter of 2001 into a second state.  This product’s contribution to net interestincome grew to $1,156,000 in the first quarter of 2002 from $649,000 in thefirst quarter of 2001, a $507,000 increase.

 

Interest income for thethree months ended March 31, 2002 decreased $230,000, or 3.2%, from the sameperiod of the prior year.   Increasedvolume of earning assets provided an additional $3,134,000 of interest income,which was more than offset by the $3,364,000 reduction in interest income dueto the reduced earnings rate of these assets.  Average earning assets for the first three months of 2002 were $21,361,000,or 7.3% higher than in the same period of 2001.  The average rate earned on assets decreased from 9.92% in thefirst quarter of 2001 to 8.95% for the same period of 2002. The percentage ofaverage loans to total average earning assets increased over the prior year andrepresents 93.2% of total average earning assets, up from 89.1% in 2001.  The average rate of return on assetsdecreased 97 basis points.

 

Total interest expense for the three months ended March 31, 2002decreased $1,118,000, or 39.4%, from the comparable period of the prioryear.  This reduction is even moredramatic when considering that the volume of interest bearing liabilitiesincreased by 11.1%.  The decrease in theinterest rate paid on deposits and borrowings, which declined 213 basis points,from 4.68% in the first quarter of 2001 to 2.55% in the first quarter of 2002,produced a reduction interest expense of $1,719,000.  Of this amount, $587,000 was offset by an increase in the volumeof these liabilities, which rose from an average of $245,684,000 in 2001 to$273,003,000 in 2002.

 

Net interest margin,defined as net interest income as a percentage of average earning assets,increased by 74 basis points to 6.74% from 6.00% in the first quarter of 2002compared to the same period in 2001.

 

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The yield and cost offunds for earning assets and interest bearing liabilities were as follows as ofand for the three months ended March 31 (dollars in thousands):

 
|                                                         |   | **2002**             |    | **2001**                        |   |
|--------------------------------------------------------------|--------|----------------------|---------|---------------------------------|--------|
|                                                         |   | **Average  Balance** |    | **Interest  Income  (Expense)** |   | **Average  Rates** |   | **Average  Balance** |   | **Interest  Income  (Expense)** |   | **Average  Rates** |   |
|                                                         |   |                 |    |                            |   |   |   |   |   |   |   |   |   |
| Earning  Assets:                                             |   |                 |    |                            |   |   |   |   |   |   |   |   |   |
| Loans  (Interest and fees)                                   |   | $                    | 293,042 |                            | $      | 6,629 |   | 9.17 | % | $ | 260,913 |   | $ | 6,702 |   | 10.42 | % |
| Federal  funds sold                                          |   | 224                  |    | 1                               |   | 1.81 | % | 4,946 |   | 56 |   | 4.59 | % |
| Investment  securities                                       |   | 20,992               |    | 306                             |   | 5.91 | % | 27,038 |   | 408 |   | 6.12 | % |
| Total  earning assets and interest income                    |   | $                    | 314,258 |                            | $      | 6,936 |   | 8.95 | % | $ | 292,897 |   | $ | 7,166 |   | 9.92 | % |
|                                                         |   |                 |    |                            |   |   |   |   |   |   |   |   |   |
| Interest  bearing liabilities:                               |   |                 |    |                            |   |   |   |   |   |   |   |   |   |
| Deposits:                                                    |   |                 |    |                            |   |   |   |   |   |   |   |   |   |
| Savings,  NOW, and                                           |   |                 |    |                            |   |   |   |   |   |   |   |   |   |
| Money  Market Deposits                                       |   | $                    | 129,040 |                            | $      | (411 | ) | 1.29 | % | $ | 99,113 |   | $ | (570 | ) | 2.33 | % |
| Time  deposits                                               |   | 130,535              |    | (1,234                          | )      | 3.83 | % | 143,157 |   | (2,207 | ) | 6.25 | % |
|                                                         |   |                 |    |                            |   |   |   |   |   |   |   |   |   |
| Total  interest bearing deposits                             |   | $                    | 259,575 |                            | $      | (1,645 | ) | 2.57 | % | $ | 242,270 |   | $ | (2,777 | ) | 4.65 | % |
|                                                         |   |                 |    |                            |   |   |   |   |   |   |   |   |   |
| Other  borrowings                                            |   | 13,428               |    | (71                             | )      | 2.14 | % | 3,414 |   | (57 | ) | 6.77 | % |
| Total interest bearing liabilities and interest  expense     |   | $                    | 273,003 |                            | $      | (1,716 | ) | 2.55 | % | $ | 245,684 |   | $ | (2,834 | ) | 4.68 | % |
|                                                         |   |                 |    |                            |   |   |   |   |   |   |   |   |   |
| Net  interest income                                         |   |                 |    | $                               | 5,220  |   |   |   |   |   | $ | 4,332 |   |   |   |
|                                                         |   |                 |    |                            |   |   |   |   |   |   |   |   |   |
| Net interest margin as a percent of average earning  assets: |   |                 |    |                            |   | 6.74 | % |   |   |   |   | 6.00 | % |

 

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

 
|                                      |   | **2002  compared to 2001  Increase (decrease) due to** |   |
|-------------------------------------------|--------|--------------------------------------------------------|--------|
|                                      |   | **Volume**                                             |   | **Rate** |   | **Net** |   |
| Interest earned  on:                      |   |                                                   |   |   |   |   |   |
| Loans                                     |   | $                                                      | 3,257  |   | $ | (3,330 | ) | $ | (73 | ) |
| Federal  funds sold and deposits in banks |   | (34                                                    | )      | (21 | ) | (55 | ) |
| Investment  securities                    |   | (89                                                    | )      | (13 | ) | (102 | ) |
| Total  interest income                    |   | 3,134                                                  |   | (3,364 | ) | (230 | ) |
|                                      |   |                                                   |   |   |   |   |   |
| Interest  paid on:                        |   |                                                   |   |   |   |   |   |
| Savings,  NOW and MMA                     |   | 768                                                    |   | (927 | ) | (159 | ) |
| Time  deposits                            |   | (181                                                   | )      | (792 | ) | (973 | ) |
| Other  borrowings                         |   | 268                                                    |   | (254 | ) | 14 |   |
| Total  Interest expense                   |   | 855                                                    |   | (1,973 | ) | 1,118 |   |
| Net  interest income                      |   | $                                                      | 2,279  |   | $ | (1,391 | ) | $ | 888 |   |

 

The change in interestdue to both rate and volume has been allocated to volume and rate changes inproportion to

 

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the relationship of theabsolute dollar amounts of the change in each.

 

Non-interest income forthe quarter ended March 31, 2002 was $325,000, or 21.8% greater than the sameperiod for 2001.  Service charges,primarily due to the implementation of a new overdraft product in the thirdquarter of 2001, increased $265,000, or 57.9%, over the first quarter of2001.  Origination fees on mortgageloans sold continued their strong performance, increasing by $131,000, or 30.8%over the same period in 2001.

 

Non-interest expenses for the first quarter of 2002 increased by$340,000, or 8.3% over the first quarter of 2001.  Salaries and employee benefits increased by $66,000, or3.0%.  Occupancy, reflecting the operationof the additional branches not in operation for the same period in 2001,increased $75,000, or 13.2%.  Otherexpense increased by $199,000, or 14.7% from the prior year, primarily due toincreased operational costs associated with the new branches and expansion ofthe small loan program since the first quarter of 2001.  Additional business and operational taxes,both related to increased volume in the small loan program as well as increasedrevenues from banking operations, increased $60,000 and correspondent bank feesincreased $50,000.

 

**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, the Companywas 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 organizational structure of the Company and its business linefinancial results are not necessarily comparable across companies.  As such, the Company’s business lineperformance may not be directly comparable with similar information from otherfinancial institutions.

 

Selected comparative financial information for the small loan division,which are included in the overall financial results, as of and for the threemonths ended March 31, are as follows (dollars in thousands):

 

 
|                                                   |   | **2002** |   | **2001** |   |
|--------------------------------------------------------|--------|----------|--------|----------|--------|
| **Assets**                                             |   |     |   |     |   |
| Due  from banks                                        |   | $        | 17,930 |     | $      | 3,372 |   |
| Net  loans                                             |   | 4,916    |   | 3,445    |   |
|                                                   |   |     |   |     |   |
| **Revenues  and Expenses**                             |   |     |   |     |   |
| Net  interest income after provision for credit losses |   | $        | 685    |     | $      | 504 |   |
| Non-interest  income                                   |   | 18       |   | 0        |   |
| Non-interest  expense                                  |   | 205      |   | 123      |   |
| Income  taxes                                          |   | 150      |   | 179      |   |
| Net  income                                            |   | $        | 348    |     | $      | 202 |   |

 

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**First Community Financial Group, Inc.**

 

**PARTII - OTHER INFORMATION**

 

**Item6      Exhibits and Reports on Form 8-K**

 
|   | (a)  Exhibits            | None   |
|--------|-------------------------------|--------|
|   |                          |   |
|   | (b)  Reports on Form 8-K | None   |

 

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**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: May 15, 2002 | By:                                    | /s/ Ken F. Parsons, Sr. |   |
|               |                                   |   |
|               |                                   | Ken F. Parsons, Sr. |
|               |                                   |   |
|               |                                   | President, Chief Executive Officer |
|               |                                   |   |
|               |                                   |   |
|               | By:                                    | /s/ James F. Arneson |   |
|               |                                   |   |
|               |                                   | James F. Arneson |
|               |                                   |   |
|               |                                   | Executive Vice  President, |
|               |                                   |   |
|               |                                   | Chief Financial Officer |
|               |                                   |   |
|               |                                   | (Principal Accounting  Officer) |
|                    |                                        |  |  |  |

 

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