**SECURITIES AND EXCHANGE COMMISSION****Washington, D.C. 20549**

 

# **FORM10-Q/A**

 

**(markone)**

 

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

 

**CommissionFile 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**   |
| (Address of  principal executive offices)                           |
|                                                                |   |   |
| Registrant’s  telephone number: **  (360) 459-1100** |

 

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

 

o Yes  ý NO

 

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

 

| **Title of Class**             |   | **Outstanding at June 30, 2002** |
|--------------------------------|--------|----------------------------------|
| Common Stock, no stated  value |   | 2,186,584                        |

 

 

----

 

**First Community Financial Group, Inc.**

 

Table of Contents

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

 

2

----

 

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

Condensed Consolidated BalanceSheets (Unaudited)

*(Dollars in Thousands)*

 
|                                                                                                                                          |   | **June 30  2002** |        | **December  31  2001** |       |
|-----------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------|-------------|------------------------|------------|
| **Assets**                                                                                                                                    |   |              |        |                   |       |
| Cash  and due from banks                                                                                                                      |   | $                 | 24,989      |                   | $          | 21,383 |   |
| Interest  bearing deposits in banks                                                                                                           |   | 72                |        | 74                     |       |
| Federal  funds                                                                                                                                |   | 900               |        | 0                      |       |
| Securities  available for sale                                                                                                                |   | 17,589            |        | 18,104                 |       |
| Securities  held to maturity                                                                                                                  |   | 505               |        | 506                    |       |
| Federal  Home Loan Bank stock                                                                                                                 |   | 2,044             |        | 1,985                  |       |
| Loans  held for sale                                                                                                                          |   | 4,475             |        | 6,196                  |       |
|                                                                                                                                          |   |              |        |                   |       |
| Loans                                                                                                                                         |   | 292,988           |        | 288,701                |       |
| Allowance  for credit losses                                                                                                                  |   | 4,480             |        | 4,088                  |       |
| **Net Loans**                                                                                                                                 |   | **288,508**       | ** **  | **284,613**            | ** ** |
|                                                                                                                                          |   |              | ** **  |                   | ** ** |
| Premises and equipment                                                                                                                        |   | 10,025            |        | 10,382                 |       |
| Foreclosed real estate                                                                                                                        |   | 4,789             |        | 4,387                  |       |
| Accrued interest received                                                                                                                     |   | 1,528             |        | 1,471                  |       |
| Cash value of life insurance                                                                                                                  |   | 8,554             |        | 8,453                  |       |
| Intangible assets                                                                                                                             |   | 6,268             |        | 6,268                  |       |
| Other assets                                                                                                                                  |   | 1,196             |        | 801                    |       |
|                                                                                                                                          |   |              | ** **  |                   | ** ** |
| **Total assets**                                                                                                                              |   | **$**             | **371,442** | ** **             | **$**      | **364,623** | ** ** |
|                                                                                                                                          |   |              | ** **  |                   | ** ** |
| **Liabilities**                                                                                                                               |   |              | ** **  |                   | ** ** |
| Deposits:                                                                                                                                     |   |              | ** **  |                   | ** ** |
| Non-interest bearing                                                                                                                          |   | $                 | 54,786      |                   | $          | 55,013 |   |
| Savings and interest bearing demand                                                                                                           |   | 129,287           |        | 123,093                |       |
| Time deposits                                                                                                                                 |   | 132,282           |        | 135,624                |       |
| **Total deposits**                                                                                                                            |   | **316,355**       | ** **  | **313,730**            | ** ** |
|                                                                                                                                          |   |              |        |                   |       |
| Federal funds purchased                                                                                                                       |   | 2,250             |        | 1,400                  |       |
| Short term borrowing                                                                                                                          |   | 6,429             |        | 5,655                  |       |
| Long term debt                                                                                                                                |   | 1,550             |        | 575                    |       |
| Accrued interest payable                                                                                                                      |   | 243               |        | 364                    |       |
| Other liabilities                                                                                                                             |   | 3,863             |        | 4,104                  |       |
| **Total  Liabilities**                                                                                                                        |   | **330,690**       | ** **  | **325,828**            | ** ** |
|                                                                                                                                          |   |              | ** **  |                   | ** ** |
| **Stockholders’ Equity**                                                                                                                 |   |              | ** **  |                   | ** ** |
| Common stock, no stated  value per share;10,000,000 shares authorized, 2,186,584 shares issued   in 2002, and 2,186,681 shares issued in 2001 |   | 28,264            |        | 28,596                 |       |
| Retained earnings                                                                                                                             |   | 12,528            |        | 9,912                  |       |
| Accumulated other comprehensive income (loss)                                                                                                 |   | (40               | )           | 312                    |       |
| Debt related to KSOP                                                                                                                          |   | 0                 |        | (25                    | )          |
| **Total stockholders’ equity**                                                                                                           |   | **40,752**        | ** **  | **38,795**             | ** ** |
|                                                                                                                                          |   |              | ** **  |                   | ** ** |
| **Total liabilities and stockholders’ equity**                                                                                           |   | **$**             | **371,442** | ** **             | **$**      | **364,623** | ** ** |

 

See notes to condensedconsolidated financial statements

 

3

----

 

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

Condensed Consolidated Statements of Income and Comprehensive Income (Unaudited)

 

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

 
|                                                                          |   | **Three  months ended  June 30,** |       | **Six months  ended  June 30,** |       |
|-------------------------------------------------------------------------------|--------|-----------------------------------|------------|---------------------------------|------------|
|                                                                          |   | **2002**                          |       | **2001**                        |       | **2002** |   | **2001** |   |
| Interest  income                                                              |   |                              |       |                            |       |   |   |   |   |
| Loans                                                                         |   | $                                 | 6,689      |                            | 7,222      |   | $ | 13,318 |   | 13,924 |   |
| Federal  funds sold and deposits in banks                                     |   | 2                                 |       | 42                              |       | 4 |   | 98 |   |
| Investments                                                                   |   | 304                               |       | 400                             |       | 609 |   | 808 |   |
| **Total interest income**                                                     |   | **6,995**                         | ** ** | **7,664**                       | ** ** | **13,931** | ** ** | **14,830** | ** ** |
| **Interest  Expense**                                                         |   |                              | ** ** |                            | ** ** |   | ** ** |   | ** ** |
| Deposits                                                                      |   | 1,383                             |       | 2,648                           |       | 3,028 |   | 5,425 |   |
| Other                                                                         |   | 81                                |       | 107                             |       | 152 |   | 164 |   |
| **Total interest expense**                                                    |   | **1,464**                         | ** ** | **2,755**                       | ** ** | **3,180** | ** ** | **5,589** | ** ** |
| **Net  interest income**                                                      |   | **5,531**                         | ** ** | **4,909**                       | ** ** | **10,751** | ** ** | **9,241** | ** ** |
| **Provision  for credit losses**                                              |   | **364**                           | ** ** | **300**                         | ** ** | **985** | ** ** | **445** | ** ** |
| **Net  interest income after provision For credit losses**                    |   | **5,167**                         | ** ** | **4,609**                       | ** ** | **9,766** | ** ** | **8,796** | ** ** |
| **Non-interest  income**                                                      |   |                              | ** ** |                            | ** ** |   | ** ** |   | ** ** |
| Service  charges on deposit accounts                                          |   | 749                               |       | 482                             |       | 1,472 |   | 940 |   |
| Origination  fees on mortgage loans sold                                      |   | 496                               |       | 475                             |       | 1,053 |   | 901 |   |
| Other  income                                                                 |   | 583                               |       | 339                             |       | 1,119 |   | 946 |   |
| **Total non-interest income**                                                 |   | **1,828**                         | ** ** | **1,296**                       | ** ** | **3,644** | ** ** | **2,787** | ** ** |
| **Non-interest  expense**                                                     |   |                              | ** ** |                            | ** ** |   | ** ** |   | ** ** |
| Salaries  and employee benefits                                               |   | 2,370                             |       | 2,368                           |       | 4,635 |   | 4,567 |   |
| Occupancy  and equipment                                                      |   | 585                               |       | 639                             |       | 1,227 |   | 1,206 |   |
| Other  expense                                                                |   | 1,586                             |       | 1,469                           |       | 3,088 |   | 2,822 |   |
| **Total non-interest expense**                                                |   | **4,541**                         | ** ** | **4,476**                       | ** ** | **8,950** | ** ** | **8,595** | ** ** |
| **Operating  income before income taxes**                                     |   | **2,454**                         | ** ** | **1,429**                       | ** ** | **4,460** | ** ** | **2,988** | ** ** |
| Income  Taxes                                                                 |   | 777                               |       | 437                             |       | 1,404 |   | 925 |   |
|                                                                          |   |                              |       |                            |       |   |   |   |   |
| **Net  income**                                                               |   | **$**                             | **1,677**  | ** **                      | **992**    | ** ** | **$** | **3,056** | ** ** | **2,063** | ** ** |
| **Operating  comprehensive income, net of tax**                               |   |                              | ** ** |                            | ** ** |   | ** ** |   | ** ** |
| Unrealized  holding gains (losses) on securities   arising during the period  |   | (88                               | )          | (51                             | )          | (352 | ) | 439 |   |
|                                                                          |   |                              |       |                            |       |   |   |   |   |
| **Comprehensive income**                                                      |   | **$**                             | **1,589**  | ** **                      | **941**    | ** ** | **$** | **2,704** | ** ** | **2,502** | ** ** |
|                                                                          |   |                              |       |                            |       |   |   |   |   |
| **Earnings per share data**                                                   |   |                              | ** ** |                            | ** ** |   | ** ** |   | ** ** |
| **Basic earnings per share**                                                  |   | **$**                             | **0.77**   | ** **                      | **0.46**   | ** ** | **$** | **1.40** | ** ** | **0.95** | ** ** |
| **Diluted  earnings per share**                                               |   | **$**                             | **0.76**   | ** **                      | **0.44**   | ** ** | **$** | **1.38** | ** ** | **0.92** | ** ** |
|                                                                          |   |                              |       |                            |       |   |   |   |   |
| Weighted  average number of common shares                                     |   | 2,187,728                         |       | 2,178,210                       |       | 2,187,412 |   | 2,177,337 |   |
| Weighted  average number of common shares  - including dilutive stock options |   | 2,218,204                         |       | 2,229,658                       |       | 2,217,043 |   | 2,234,401 |   |
| Return  on average assets                                                     |   | 1.80                              | %          | 1.14                            | %          | 1.65 | % | 1.22 | % |
|                                                                          |   |                              |       |                            |       |   |   |   |   |
| Dividends  per share                                                          |   | $                                 | 0.10       |                            | 0.10       |   | $ | 0.20 |   | 0.20 |   |

 

See notes to condensedconsolidated financial statements

 

4

----

 

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

Condensed Consolidated Statements of Stockholders’ Equity (Unaudited)

Six Months EndedJune 30, 2001 and 2002

 

(Dollars in thousands)

 
|                                   |   | **Common  Stock** |       | **Retained  Earnings** |       | **Accumulated  Other  Comprehensive  Income (Loss)** |       | **Debt  Related  To KSOP** |       | **Total**  |       |
|----------------------------------------|--------|-------------------|------------|------------------------|------------|------------------------------------------------------|------------|----------------------------|------------|------------|------------|
|                                   |   |              |       |                   |       |                                                 |       |                       |       |       |       |
| Balance,  December 31, 2000            |   | $                 | 28,559     |                   | $          | 6,349                                                |       | $                          | (332       | )          | $          | (203 | ) | $ | 34,373 |   |
|                                   |   |              |       |                   |       |                                                 |       |                       |       |       |       |
| Net  Income                            |   | —            |       | 2,063                  |       | —                                               |       | —                     |       | 2,063      |       |
|                                   |   |              |       |                   |       |                                                 |       |                       |       |       |       |
| Stock  options exercised               |   | 27                |       | —                 |       | —                                               |       | —                     |       | 27         |       |
|                                   |   |              |       |                   |       |                                                 |       |                       |       |       |       |
| Cash  dividend ($0.20 per share)       |   | —            |       | (437                   | )          | —                                               |       | —                     |       | (437       | )          |
|                                   |   |              |       |                   |       |                                                 |       |                       |       |       |       |
| Other  comprehensive income            |   | —            |       | —                 |       | 439                                                  |       | —                     |       | 439        |       |
|                                   |   |              |       |                   |       |                                                 |       |                       |       |       |       |
| Net  decrease in debt related  To KSOP |   | —            |       | —                 |       | —                                               |       | 89                         |       | 89         |       |
|                                   |   |              |       |                   |       |                                                 |       |                       |       |       |       |
| **Balance,  June 30, 2001**            |   | **$**             | **28,586** | ** **             | **$**      | **7,975**                                            | ** ** | **$**                      | **107**    | ** ** | **$**      | **(114** | **)** | **$** | **36,554** | ** ** |
|                                   |   |              | ** ** |                   | ** ** |                                                 | ** ** |                       | ** ** |       | ** ** |
| **Balance,  December 31, 2001**        |   | **$**             | **28,596** | ** **             | **$**      | **9,912**                                            | ** ** | **$**                      | **312**    | ** ** | **$**      | **(25** | **)** | **$** | **38,795** | ** ** |
|                                   |   |              |       |                   |       |                                                 |       |                       |       |       |       |
| Net  income                            |   | —            |       | 3,056                  |       | —                                               |       | —                     |       | 3,056      |       |
|                                   |   |              |       |                   |       |                                                 |       |                       |       |       |       |
| Stock  options exercised               |   | 618               |       | —                 |       | —                                               |       | —                     |       | 618        |       |
|                                   |   |              |       |                   |       |                                                 |       |                       |       |       |       |
| Cash  dividend ($0.20 per share)       |   | —            |       | (440                   | )          | —                                               |       | —                     |       | (440       | )          |
|                                   |   |              |       |                   |       |                                                 |       |                       |       |       |       |
| Stock  repurchased                     |   | (950              | )          | —                 |       | —                                               |       | —                     |       | (950       | )          |
|                                   |   |              |       |                   |       |                                                 |       |                       |       |       |       |
| Other  comprehensive income            |   | —            |       | —                 |       | (352                                                 | )          | —                     |       | (352       | )          |
|                                   |   |              |       |                   |       |                                                 |       |                       |       |       |       |
| Net  decrease in debt related  To KSOP |   | —            |       | —                 |       | —                                               |       | 25                         |       | 25         |       |
|                                   |   |              |       |                   |       |                                                 |       |                       |       |       |       |
| **Balance,  June 30, 2002**            |   | **$**             | **28,264** | ** **             | **$**      | **12,528**                                           | ** ** | **$**                      | **(40**    | **)**      | **$**      | **0** | ** ** | **$** | **40,752** | ** ** |

 

See notes to condensedconsolidated financial statements

 

5

----

 

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

Condensed Consolidated Statements of Cash Flows (Unaudited)

 

(Dollars in thousands)

 
|                                                                                               |   | **Six Months  Ended  June 30,** |       |
|----------------------------------------------------------------------------------------------------|--------|---------------------------------|------------|
|                                                                                               |   | **2002**                        |       | **2001** |   |
| **Cash Flows from Operating Activities**                                                           |   |                            |       |   |   |
| Net  Income                                                                                        |   | $                               | 3,056      |   | $ | 2,063 |   |
| Adjustments  to reconcile net income to net cash provided by  (used in) Operating activities: |   |                            |       |   |   |
| Provision  for credit losses                                                                       |   | 985                             |       | 445 |   |
| Depreciation  and amortization                                                                     |   | 583                             |       | 540 |   |
| Amortization  of intangible assets                                                                 |   | 0                               |       | 205 |   |
| Increase  in cash value of life insurance                                                          |   | (101                            | )          | (2 | ) |
| Other  – net                                                                                  |   | (739                            | )          | 1,221 |   |
| Originations  of loans held for sale                                                               |   | (41,701                         | )          | (41,241 | ) |
| Proceeds  from sales of loans held for sale                                                        |   | 43,422                          |       | 38,658 |   |
| **Net  cash provided by operating activities**                                                     |   | **5,505**                       | ** ** | **1,889** | ** ** |
|                                                                                               |   |                            |       |   |   |
| **Cash  Flows from Investing Activities**                                                          |   |                            | ** ** |   | ** ** |
| Net  decrease in interest bearing deposits in banks                                                |   | 2                               |       | 18 |   |
| Net  increase in Federal funds sold                                                                |   | (900                            | )          | 0 |   |
| Proceeds  from maturities of available-for-sale securities                                         |   | 2,479                           |       | 2,805 |   |
| Purchase  of securities available for sale                                                         |   | (2,424                          | )          | 0 |   |
| Net  increase in loans                                                                             |   | (5,607                          | )          | (17,212 | ) |
| Proceeds  from sale of other real estate                                                           |   | 325                             |       | 164 |   |
| Additions  to premises and equipment                                                               |   | (226                            | )          | (997 | ) |
| Purchase  of life insurance                                                                        |   | 0                               |       | (5,008 | ) |
| **Net  cash used by investing activities**                                                         |   | **(6,351**                      | **)**      | **(20,230** | **)** |
|                                                                                               |   |                            |       |   |   |
| **Cash  Flows from Financing Activities**                                                          |   |                            | ** ** |   | ** ** |
| Net  increase in deposits                                                                          |   | 2,625                           |       | 32,273 |   |
| Net  increase (decrease) in short-term borrowings                                                  |   | 1,624                           |       | (6,133 | ) |
| Sale  of common stock                                                                              |   | 618                             |       | 27 |   |
| Repurchase  of common stock                                                                        |   | (950                            | )          | 0 |   |
| Increase  in long term borrowings                                                                  |   | 1,000                           |       | 0 |   |
| Repayment  of long-term borrowings                                                                 |   | (25                             | )          | (89 | ) |
| Payment  of dividends                                                                              |   | (440                            | )          | (437 | ) |
| **Net  cash provided by financing activities**                                                     |   | **4,452**                       | ** ** | **25,641** | ** ** |
|                                                                                               |   |                            |       |   |   |
| **Net  change in cash and due from banks**                                                         |   | **3,606**                       | ** ** | **7,300** | ** ** |
|                                                                                               |   |                            |       |   |   |
| **Cash  and Due from Banks:**                                                                      |   |                            | ** ** |   | ** ** |
| Beginning  of period                                                                               |   | 21,383                          |       | 12,640 |   |
|                                                                                               |   |                            |       |   |   |
| **End of  period**                                                                                 |   | **$**                           | **24,989** | ** ** | **$** | **19,940** | ** ** |
|                                                                                               |   |                            |       |   |   |
| **Supplemental  Disclosures of Cash Flow Information:**                                            |   |                            | ** ** |   | ** ** |
| **Cash  payments for:**                                                                            |   |                            | ** ** |   | ** ** |
| Interest                                                                                           |   | $                               | 3,301      |   | $ | 5,661 |   |
| Taxes                                                                                              |   | 1,415                           |       | 865 |   |
|                                                                                               |   |                            |       |   |   |
| **Supplemental  Disclosures of Non-Cash Investing Activities:**                                    |   |                            | ** ** |   | ** ** |
| Other  real estate acquired in settlement of loans                                                 |   | $                               | 727        |   | $ | 56 |   |
| Fair  value adjustment of securities available for sale, net                                       |   | (352                            | )          | 439 |   |
| Decrease  in guarantee of KSOP obligation                                                          |   | (25                             | )          | (89 | ) |

 

See notes tocondensed consolidated financial statements

 

6

----

 

**FIRST COMMUNITY FINANCIAL GROUP, INC.AND SUBSIDIARIES**Notes to Condensed Consolidated FinancialStatements(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, include in theCompany’s 2001 Annual Report to Shareholders. Operating results for the three months ended June 30, 2002 are notnecessarily indicative of the results anticipated for the year ending December31, 2002.

 

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

 

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

 

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

 
|                                                           |   | **Three  Months Ended June 30,** |      | **Six Months  Ended June 30,** |   |
|----------------------------------------------------------------|--------|----------------------------------|-----------|--------------------------------|--------|
|                                                           |   | **2002**                         |      | **2001**                       |   | **2002** |   | **2001** |   |
|                                                           |   |                             |      |                           |   |   |   |   |   |
| Basic  EPS computation                                         |   | $                                | 1,677,000 |                           | $      | 992,000 |   | $ | 3,056,000 |   | $ | 2,063,000 |   |
| Numerator  – Net Income                                   |   |                             |      |                           |   |   |   |   |   |
|                                                           |   |                             |      |                           |   |   |   |   |   |
| Denominator  – Weighted Average common shares outstanding |   | 2,187,728                        |      | 2,178,210                      |   | 2,187,412 |   | 2,177,337 |   |
|                                                           |   |                             |      |                           |   |   |   |   |   |
| Basic  EPS                                                     |   | $                                | .77       |                           | $      | .46 |   | $ | 1.40 |   | $ | .95 |   |
|                                                           |   |                             |      |                           |   |   |   |   |   |
| Diluted  EPS computation                                       |   | $                                | 1,677,000 |                           | $      | 992,000 |   | $ | 3,056,000 |   | $ | 2,063,000 |   |
| Numerator  – Net Income                                   |   |                             |      |                           |   |   |   |   |   |   |   |   |   |
|                                                           |   |                             |      |                           |   |   |   |   |   |
| Denominator  – Weighted Average common shares outstanding |   | 2,187,728                        |      | 2,178,210                      |   | 2,187,412 |   | 2,177,337 |   |
|                                                           |   |                             |      |                           |   |   |   |   |   |
| Effect  of dilutive stock options                              |   | 30,476                           |      | 51,448                         |   | 29,631 |   | 57,064 |   |
|                                                           |   |                             |      |                           |   |   |   |   |   |
| Weighted  average common shares and common stock equivalents   |   | 2,218,204                        |      | 2,229,658                      |   | 2,217,043 |   | 2,234,401 |   |
|                                                           |   |                             |      |                           |   |   |   |   |   |
| Diluted  EPS                                                   |   | $                                | .76       |                           | $      | .44 |   | $ | 1.38 |   | $ | .92 |   |

 

7

----

 

**3.             RecentAccounting Pronouncements**

 

The Financial AccountingStandards Board issued Financial Accounting Standards No. 141, BusinessCombinations, and 142, Goodwill and Other Intangible Assets, in 2001, with aneffective date of January 1, 2002.  SFASNo. 141 requires that all business combinations entered into after June 30, 2001be accounted for under the purchase method. SFAS No. 142 addresses how goodwill and other intangible assets shouldbe accounted for after they have been initially recorded in the financialstatements.  Goodwill arising frombusiness combinations prior to the effective date of this standard will nolonger be amortized, starting in 2002, but will be subject to annual tests forimpairment.  In accordance with theprovisions of SFAS No. 142, the Company has completed its transitionalassessment of goodwill impairment and has determined that no adjustment forgoodwill impairment is required.  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 $104,000 in thesix months ended June 30, 2002.  Theremaining intangible assets of $2,009,000 will continue to be amortized.

 

In June 2001, the FASBalso issued SFAS No. 143, *Accounting for Asset Retirement Obligations*.  This statement addresses financialaccounting and reporting obligations associated with the retirement of tangiblelong-lived assets and the associated annual retirement costs.  This statement is effective for all fiscalyears beginning after June 15, 2002.  InAugust 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.

 

**4.             Subsequent Events**

 

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

 

On August 5, 2002 theCompany announced the signing of a definitive agreement pursuant to whichHarbor Bank, N.A. would merge with First Community Bank.  Upon completion of the transaction, HarborBank shareholders, with a total of 643,000 shares of common stock outstanding,would receive $10.75 per share in cash for each share of Harbor Bank commonstock.  The per-share consideration maybe reduced if Harbor Bank’s Tier 1 capital plus reserve for possible loan andlease losses is less than $4,750,000 at the time of closing. The reduction in the per-share considerationwould be calculated by dividing the amount by which Harbor Bank’s Tier 1capital plus loan loss reserve is below $4,750,000 by the total number ofshares of Harbor Bank common stock outstanding at closing.  Each outstanding option to purchase HarborBank common stock will be converted into the right to receive, for each sharecovered by such option, cash in the amount the per-share consideration exceedsthe exercise price of the option.  TheCompany expects to pay aggregate consideration of approximately $7.0 million.

 

The boards of directorsof the Company, First Community Bank and Harbor Bank have each approved thedefinitive agreement. Completion of the transaction is expected late in thethird quarter or early in the fourth quarter of 2002 and is subject toregulatory and shareholder approval.

 

**Issuance of Trust PreferredSecurities**

 

On July 11 2002, theCompany completed an offering of trust preferred securities and received netproceeds of approximately $12,600,000. The proceeds are expected to fund the acquisition of Harbor Bank, N.A.,with the remaining balance added to the capital of First Community Bank.  Trust preferred securities consist of theissuance of subordinated debt securities to a wholly owned subsidiary businesstrust, which then issues preferred stock to investors.  The interest payments on the debt securitiesare approximately equal to the dividend payments on the preferred stock of thetrust.  The Company will be able torecognize a deduction of the interest cost for income tax purposes, while thenet proceeds will qualify as Tier 1 capital.

 

8

----

 

**Item 2**

 

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

 

This discussion containscertain forward-looking statements within the meaning of the federal securitieslaws.  Actual results and the timing ofcertain events could differ materially from those projected in theforward-looking statements due to a number of factors.

 

**Financial Condition**

 

Overview

 

The Company’sconsolidated total assets at June 30, 2002 of $371,442,000 represents a 1.9%increase over December 31, 2001 assets of $364,623,000.  The growth in assets was a combination of a$3,895,000 increase in net portfolio loans and cash in banks, which is used tosatisfy regulatory requirements as well as provide the operational funding ofthe Company’s small-loan program.  Thecomposition of the loan portfolio at June 30, 2002 and December 31, 2001follows (dollars in thousands):

 

|         |   | **June 30,  2002** |        | **December  31,  2001** |   |
|--------------|--------|--------------------|-------------|-------------------------|--------|
|         |   |               |        |                    |   |
| Commercial   |   | $                  | 48,613      |                    | $      | 40,870 |   |
|         |   |               |        |                    |   |
| Real  Estate |   |               |        |                    |   |
|         |   |               |        |                    |   |
| Mortgage     |   | 178,179            |        | 185,012                 |   |
|         |   |               |        |                    |   |
| Construction |   | 55,013             |        | 50,798                  |   |
|         |   |               |        |                    |   |
| Consumer     |   | 4,394              |        | 4,732                   |   |
|         |   |               |        |                    |   |
| Small  Loans |   | 6,789              |        | 7,289                   |   |
|         |   |               |        |                    |   |
|         |   | **$**              | **292,988** |                    | **$**  | **288,701** | ** ** |

 

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

 

|                                     |   | **June 30  2002** |      | **December  31  2001** |   |
|------------------------------------------|--------|-------------------|-----------|------------------------|--------|
|                                     |   |              |      |                   |   |
| Non-accrual  loans                       |   | $                 | 2,242     |                   | $      | 1,830 |   |
| Accruing  loans past due 90 days or more |   | 414               |      | 284                    |   |
| Foreclosed  real estate                  |   | 4,789             |      | 4,387                  |   |
| Other  assets                            |   | 0                 |      | 7                      |   |
|                                     |   |              |      |                   |   |
|                                     |   | **$**             | **7,445** |                   | **$**  | **6,508** | ** ** |

 

Non-accrual loansincreased by $412,000 during the first half of 2002.  Accruing loans past due 90 days or more increased $130,000 overthe same period.  Loans in this categorymust be well secured and in the process of collection for the accrual ofinterest to continue.  These loans aremonitored and may be reclassified as non-accrual as conditions warrant. ** **Foreclosed real estate hasincreased by $402,000 from prior yearend.  The percentage of non-performing loans to total loans increased to 0.91%from 0.73% at December 31, 2001.

 

9

----

 

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 June 30, 2002,the levels of classified loans, losses experienced during the period, and thechanges in the economy, management has determined the allowance for creditlosses to be adequate to cover the loss exposure in the loan portfolio at thatdate.  An analysis of the adequacy of theallowance is subject to quarterly review by the Board of Directors.

 

The allowance for creditlosses increased $392,000 in the first half of 2002.  The ratio of allowance for credit losses to total loans increasedduring the first half of 2002 to 1.53% from 1.42% at December 31, 2001.  The dollar value change in the allowanceconsisted of $985,000 of provision less $593,000 in net charge-offs ofloans.  Charge-offs were concentrated inthe Company’s small-loan portfolio. Management increased the allowance for credit losses during the sixmonths ended June 30, 2002 in recognition of the increase in non-performingloans as shown in the table above, the increase in loans internally classifiedin the Bank’s loan classification system, and the continued softness of theeconomy in the Bank’s primary market area. The allowance at June 30, 2002 is slightly higher than the mid-point ofloss exposure identified in the Bank’s loan loss adequacy analysis model.

 

Investment securitiesdecreased by $516,000, or 2.8% during the first half of 2002 to a total of$18,094,000.    Additional securitieswere purchased during the first quarter primarily as a source of collateral forthe Company’s operations.

 

Total deposits increased$2,625,000, or 0.8% in the six months ended June 30, 2002 to $316,355,000.  The mix of deposits shifted towardtransaction accounts during the first half, with increases shown in savings andinterest-bearing deposits and a smaller decrease in time deposits.  Short-term borrowings have also been used asa funding source due to their relatively low cost as compared to timedeposits.  Fed funds purchased and shortterm borrowings increased during the first half by $1,624,000 to $8,679,000 dueto their favorable cost and flexibility in managing funding.

 

Liquidity

 

Liquidity managementinvolves the ability to meet cash flow requirements of customers who may beeither depositors wanting to withdraw funds or borrowers needing assurance thatsufficient funds will be available to meet their credit needs.  Liquidity is generated from both internal andexternal sources.  Internal sources arethose assets that can be converted to cash with little or no risk of loss.  These include overnight investments ininterest bearing deposits in banks and federal funds sold and investmentsecurities, particularly those of shorter maturity, and are the principalsource of asset liquidity.  At June 30,2002, cash, deposits in banks, federal funds sold and securities available forsale totaled $43,550,000.  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 June 30, 2002, borrowinglines of credit totaled $47,686,000. These credit facilities are being used regularly as a source of funds.At June 30, 2002, $7,250,000 was borrowed against these lines of credit in theform of federal funds purchased and term advances.

 

Management believes theBank’s liquidity position at June 30, 2002, was adequate to meet its short termfunding requirements.

 

Capital

Consolidated capital ofFCFG increased $1,957,000 during the first half of 2002.  The increase comes primarily from netincome, which increased capital by $3,056,000. Capital also increased $618,000 from the exercising of stock options$25,000 for the elimination of the debt related to the KSOP plan.  Stock repurchases in the amount of $950,000,dividends paid of $440,000 and an after-tax decrease in the valuation of thesecurities portfolio of $352,000 were reductions to the capital total.

 

10

----

 

There are regulatoryconstraints placed upon capital adequacy, and it is necessary to maintain anappropriate ratio between capital and assets. Regulations require banks and holding companies to maintain a minimumleverage ratio (primary capital to total assets ratio).  For the most highly rated holding companiesthis ratio must be at least 3%, and for others it must be 4 to 5%.  At June 30, 2002, the Company’s leverage ratiowas 9.37**%**,compared to 8.91% at year-end 2001.  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, 2002, the Tier Icapital ratio was 9.87%, and total capital was 11.12%.  At December 31, 2001 the Tier I capitalratio was 9.34% and the total capital ratio was 10.52%.

 

**Issuance of Trust Preferred Securities**

 

On July 11 2002, theCompany completed an offering of trust preferred securities and received netproceeds of approximately $12,600,000. The proceeds are expected to fund the acquisition of Harbor Bank, N.A.,with the remaining balance added to the capital of First Community Bank.  Trust preferred securities consist of theissuance of subordinated debt securities to a wholly owned subsidiary businesstrust, which then issues preferred stock to investors.  The interest payments on the debt securitiesare approximately equal to the dividend payments on the preferred stock of thetrust.  The Company will be able torecognize a deduction of the interest cost for income tax purposes, while thenet proceeds will qualify as Tier 1 capital.

 

**Results of Operations**

 

General

 

Net income for the sixmonths ended June 30, 2002 was $3,056,000, compared to $2,063,000 for the sameperiod in 2001.  This represents a 48%increase over the prior year.   Netincome for the three months ended June 30, 2002 was $1,677,000, compared to$992,000 for the three months ended June 30, 2001.  This represents a 69% increase in net income for the period.

 

Net interest incomeincreased $1,510,000, an increase of 16% for the six months ended June 30, 2002over the same period for 2001.  Netinterest income increased $622,000, or 13%, for the three months ended June 30,2002.  The increase in the Company’s netinterest income is primarily the result of the reduction in interest rates, andcorresponding reduction in cost of funds. The Company’s small-loan product also had an impact on the growth in netinterest income.    This product’scontribution to net interest income grew to $2,257,000 in the first half of2002 from $1,548,000 in the first half of 2001, a $709,000 increase.

 

Interest income for thesix months ended June 30, 2002 decreased $899,000, or 6%, from the same periodof the prior year.   Increased volume ofearning assets provided an additional $2,728,000 of interest income, which wasmore than offset by the $3,627,000 reduction in interest income due to thereduced earnings rate of these assets.  Average earning assets for the first six months of 2002 were$17,746,000, or 6% higher than in the same period of 2001.  The average rate earned on assets decreased114 basis points from 10.03% in the first half of 2001 to 8.89% for the sameperiod of 2002. The percentage of average loans to total average earning assetsincreased over the prior year and represents 93.4% of total average earningassets, up from 89.8% in 2001.  Interestincome for the three months ended June 30, 2002 was $669,000 lower than thesame period in the previous year.

 

Total interest expensefor the six months ended June 30, 2002 decreased $2,409,000, or 43%, from thecomparable period of the prior year. This reduction is even more dramatic when considering that the volume ofinterest bearing liabilities increased by 9%. The decrease in the interest rate paid on deposits and borrowings, whichdeclined 214 basis points, from 4.48% in the first half of 2001 to 2.34% in thefirst half of 2002, produced a reduction in interest expense of$2,988,000.  Of this amount, $579,000was offset by an increase in the volume of these liabilities, which rose froman average of $251,802,000 in 2001 to $274,532,000 in 2002.  Total interest expense for the three monthsended June 30, 2002 was $1,291,000 lower than the second quarter of 2001.

 

Net interest margin,defined as net interest income as a percentage of average earning assets, increasedby 61 basis points to 6.86% from 6.25% in the first half of 2002 compared tothe same period in 2001.

 

11

----

 

The yield and cost offunds for earning assets and interest bearing liabilities were as follows as ofand for the six months ended June 30 (dollars in thousands):

 
|                                                         |   | **Average  Balance** |    | **2002  Interest  Income  (Expense)** |   | **Average  Rates** |   | **Average  Balance** |   | **2001  Interest  Income  (Expense)** |    | **Average  Rates** |   |
|--------------------------------------------------------------|--------|----------------------|---------|---------------------------------------|--------|--------------------|--------|----------------------|--------|---------------------------------------|---------|--------------------|--------|
| Earning  Assets:                                             |   |                 |    |                                  |   |               |   |                 |   |                                  |    |               |   |
| Loans  (Interest and Fees)                                   |   | $                    | 294,994 |                                  | $      | 13,318             |   | 9.10                 | %      | $                                     | 267,710 |               | $      | 13,924 |   | 10.49 | % |
| Federal  funds sold                                          |   | 386                  |    | 3                                     |   | 1.57               | %      | 3,717                |   | 98                                    |    | 5.32               | %      |
| Investment  securities                                       |   | 20,490               |    | 610                                   |   | 6.00               | %      | 26,697               |   | 808                                   |    | 6.10               | %      |
|                                                         |   |                 |    |                                  |   |               |   |                 |   |                                  |    |               |   |
| Total  earning assets and interest income                    |   | $                    | 315,870 |                                  | $      | 13,931             |   | 8.89                 | %      | $                                     | 298,124 |               | $      | 14,830 |   | 10.03 | % |
|                                                         |   |                 |    |                                  |   |               |   |                 |   |                                  |    |               |   |
| Interest  bearing liabilities:                               |   |                 |    |                                  |   |               |   |                 |   |                                  |    |               |   |
| Deposits:                                                    |   |                 |    |                                  |   |               |   |                 |   |                                  |    |               |   |
| Savings,  NOW, and Money Market Deposits                     |   | $                    | 129,873 |                                  | $      | (827               | )      | 1.28                 | %      | $                                     | 102,926 |               | $      | (1,195 | ) | 2.34 | % |
| Time  deposits                                               |   | 129,339              |    | (2,201                                | )      | 3.43               | %      | 142,562              |   | (4,230                                | )       | 5.98               | %      |
|                                                         |   |                 |    |                                  |   |               |   |                 |   |                                  |    |               |   |
| Total  interest bearing deposits                             |   | $                    | 259,212 |                                  | $      | (3,028             | )      | 2.36                 | %      | $                                     | 245,488 |               | $      | (5,425 | ) | 4.46 | % |
|                                                         |   |                 |    |                                  |   |               |   |                 |   |                                  |    |               |   |
| Other  borrowings                                            |   | 15,320               |    | (152                                  | )      | 2.28               | %      | 6,314                |   | (164                                  | )       | 5.24               | %      |
| Total  interest bearing liabilities and interest expense     |   | $                    | 274,532 |                                  | $      | (3,180             | )      | 2.34                 | %      | $                                     | 251,802 |               | $      | (5,589 | ) | 4.48 | % |
|                                                         |   |                 |    |                                  |   |               |   |                 |   |                                  |    |               |   |
| Net  interest income                                         |   |                 |    | $                                     | 10,751 |               |   |                 |   |                                  | $       | 9,241              |   |   |   |
|                                                         |   |                 |    |                                  |   |               |   |                 |   |                                  |    |               |   |
| Net  interest margin as a percent of average earning assets: |   |                 |    |                                  |   | 6.86               | %      |                 |   |                                  |    | 6.25               | %      |

 

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

 

|                                      |   | **2002  compared to 2001  Increase (decrease due to** |   |
|-------------------------------------------|--------|-------------------------------------------------------|--------|
|                                      |   | **Volume**                                            |   | **Rate** |   | **Net** |   |
| Interest  earned on:                      |   |                                                  |   |   |   |   |   |
| Loans                                     |   | $                                                     | 2,966  |   | $ | (3,572 | ) | $ | (606 | ) |
| Federal  funds sold and deposits in banks |   | (53                                                   | )      | (42 | ) | (95 | ) |
| Investment  securities                    |   | (185                                                  | )      | (13 | ) | (198 | ) |
| Total  Interest income                    |   | 2,728                                                 |   | (3,627 | ) | (899 | ) |
|                                      |   |                                                  |   |   |   |   |   |
| Interest  paid on:                        |   |                                                  |   |   |   |   |   |
| Savings,  NOW and MMA                     |   | 664                                                   |   | (1,032 | ) | (368 | ) |
| Time  deposits                            |   | (362                                                  | )      | (1,667 | ) | (2,029 | ) |
| Other  borrowings                         |   | 277                                                   |   | (289 | ) | (12 | ) |
| Total  Interest expense                   |   | 579                                                   |   | (2,988 | ) | (2,409 | ) |
|                                      |   |                                                  |   |   |   |   |   |
| Net  interest income                      |   | $                                                     | 2,149  |   | $ | (639 | ) | $ | 1,510 |   |

 

12

----

 

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

 

Non-interest incomeincreased by $857,000, or 31%, from the first half of 2001.  Service charges, primarily due to theimplementation of a new overdraft product in the third quarter of 2001,increased $532,000, or 57%, over the first half of 2001.  Origination fees on mortgage loans soldcontinued their strong performance, increasing by $152,000, or 17% over thesame period in 2001.  Non-interestincome for the three months ended June 30, 2002 increased $532,000, or 41% overthe prior year.

 

Non-interest expenses forthe first half of 2002 increased by $355,000, or 4%, over the first half of2001.  Compensation expense increased$68,000, or 1%.  Occupancy expensesincreased $21,000, or 2%.  The otherexpenses increase of $366,000 included an additional $103,000 in expenses relatedto the operation of the small-loan program, including increased business andoccupation taxes and correspondent bank fees, as well as $86,000 in expensesrelated to the implementation of a new overdraft product in the third quarterof 2001.  Non-interest expenses for thesecond quarter of 2002 increased $65,000, or 1%, over the second quarter of2001.  The ratio of non-interest expenseto average assets decreased to 4.82% for the six months ended June 30, 2002 from5.07% in 2001.  The ratio of net overhead(non-interest expense minus non-interest income) divided by average totalassets decreased to 1.44% for the six months ended June 30, 2002 from 3.42% forthe same period in 2001.

 

**Business Segment Reporting**

 

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

 

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

 

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

 

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

 
|                                                   |   | **Community  Banking** |    | **Small  Loans** |   | **Total** |   |
|--------------------------------------------------------|--------|------------------------|---------|------------------|--------|-----------|--------|
|                                                   |   |                   |    |             |   |      |   |
| Net  Interest income after provision for credit losses |   | $                      | 8,194   |             | $      | 1,572     |   | $ | 9,766 |   |
|                                                   |   |                   |    |             |   |      |   |
| Non-interest  income                                   |   | 3,644                  |    | —           |   | 3,644     |   |
|                                                   |   |                   |    |             |   |      |   |
| Non-interest  expense                                  |   | 8,554                  |    | 396              |   | 8,950     |   |
|                                                   |   |                   |    |             |   |      |   |
| Income  taxes                                          |   | 1,014                  |    | 390              |   | 1,404     |   |
|                                                   |   |                   |    |             |   |      |   |
| Net  Income                                            |   | $                      | 2,270   |             | $      | 786       |   | $ | 3,056 |   |
|                                                   |   |                   |    |             |   |      |   |
| Total  assets                                          |   | $                      | 351,384 |             | $      | 20,058    |   | $ | 371,442 |   |
|                                                   |   |                   |    |             |   |      |   |
| Total  Loans                                           |   | $                      | 286,199 |             | $      | 6,789     |   | $ | 292,988 |   |

 

13

----

 
| **Six Months ended June 30, 2001**                     |   | **Community  Banking** |    | **Small  Loans** |   | **Total** |   |
|--------------------------------------------------------|--------|------------------------|---------|------------------|--------|-----------|--------|
|                                                   |   |                   |    |             |   |      |   |
| Net  Interest income after provision for credit losses |   | $                      | 7,693   |             | $      | 1,103     |   | $ | 8,796 |   |
|                                                   |   |                   |    |             |   |      |   |
| Non-Interest  income                                   |   | 2,787                  |    | —           |   | 2,787     |   |
|                                                   |   |                   |    |             |   |      |   |
| Non-Interest  expense                                  |   | 8,337                  |    | 258              |   | 8,595     |   |
|                                                   |   |                   |    |             |   |      |   |
| Income  taxes                                          |   | 638                    |    | 287              |   | 925       |   |
|                                                   |   |                   |    |             |   |      |   |
| Net  Income                                            |   | $                      | 1,505   |             | 558    |      | 2,063  |   |
|                                                   |   |                   |    |             |   |      |   |
| Total  assets                                          |   | $                      | 338,865 |             | $      | 13,435    |   | $ | 352,300 |   |
|                                                   |   |                   |    |             |   |      |   |
| Total  Loans                                           |   | $                      | 265,489 |             | $      | 6,461     |   | $ | 271,950 |   |

 

**Item 3****         Quantitative and QualitativeDisclosure About Market Risk**

 

**Rate Sensitivity**

 

The Company’s assets andliabilities are managed to maximize long-term shareholder returns by optimizingnet interest income within the constraints of maintaining high credit quality,conservative interest rate risk disciplines and prudent levels of liquidity.  The Asset/Liability Committee meetsregularly to monitor the composition of the balance sheet, to assess currentand projected interest rate trends, and to formulate strategies consistent withestablished objectives for liquidity, interest rate risk and capital adequacy.

 

Interest rate sensitivityis closely related to liquidity, as each is directly affected by the maturityof assets and liabilities.  TheCompany’s net interest margin is affected by changes in the level of market interestrates.  Management’s objectives are tomonitor and control interest rate risk and ensure predictable and consistentgrowth 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.

 

14

----

 

**Interest Rate Gap AnalysisJune 30, 2002**

** **
| **(dollars in thousands)**            |   | **Within  One Year** |     | **After One  But Within  Five Year** |   | **After  Five Years** |   | **Total** |    |
|---------------------------------------|--------|----------------------|----------|--------------------------------------|--------|-----------------------|--------|-----------|---------|
| Loans                                 |   | $                    | 121,846  |                                 | $      | 132,373               |   | $         | 38,769  |   | $ | 292,988 |   |
| Securities:                           |   |                 |     |                                 |   |                  |   |      |    |
| Available  for sale                   |   | 3,314                |     | 7,010                                |   | 7,265                 |   | 17,589    |    |
| Held  to maturity                     |   | —               |     | 505                                  |   | —                |   | 505       |    |
| Interest  bearing deposits with banks |   | 72                   |     | —                               |   | —                |   | 72        |    |
| Fed  funds sold                       |   | 900                  |     | —                               |   | —                |   | 900       |    |
| Total  Earnings Assets                |   | $                    | 126,132  |                                 | $      | 139,888               |   | $         | 46,034  |   | $ | 312,054 |   |
|                                  |   |                 |     |                                 |   |                  |   |      |    |
| Deposits                              |   |                 |     |                                 |   |                  |   |      |    |
| Savings,  NOW and money market        |   | $                    | 129,287  |                                 | — |                  | $      | —    |    | $ | 129,287 |   |
| Time  deposits                        |   | 121,406              |     | $                                    | 10,876 |                  | — |      | 132,282 |   |
| Short-term  borrowings                |   | 8,679                |     | —                               |   | —                |   | 8,679     |    |
| Long-term  debt                       |   | 550                  |     | 1,000                                |   | —                |   | 1,550     |    |
|                                  |   |                 |     |                                 |   |                  |   |      |    |
| Total  Interest Bearing Liabilities   |   | $                    | 259,922  |                                 | $      | 11,876                |   | —    |    | $ | 271,798 |   |
|                                  |   |                 |     |                                 |   |                  |   |      |    |
| Net  Interest Rate Sensitivity Gap    |   | $                    | (133,790 | )                                    | $      | 128,012               |   | $         | 46,034  |   | $ | 40,256 |   |

 

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

 

The Company has marketrisk in the form of interest rate risk on its financial assets.  In an effort to understand the relativeimpact of this risk on the Company’s current financial situation, a 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 theirsensitivity to pricing changes of such a market interest rate change.  According to this model and its assumptions,the change in net interest income over a 12 month period in the event marketinterest rates were to immediately rise or fall by 100 basis points isestimated to be $188,000.

 

15

----

 

**FIRST COMMUNITY FINANCIAL GROUP, INC.**

 

**PART II****– OTHERINFORMATION**

 

**Item 4****     Submission of Matters to Vote of SecurityHolders**

 

On May 5, 2002, the Company held it’s 2002 AnnualShareholder’s Meeting

 

Five members of the Company’s Board of Director’s wereelected with at least 1,700,273 votes being cast for.  The voting details are as follows:

 
| Lowell  (Sonny) Bridges   |   | 1,723,564 |   | FOR |   | 10,444 |   | WITHHELD |   |
|---------------------------|--------|-----------|--------|-----|--------|--------|--------|----------|--------|
| Linda  Buckner            |   | 1,719,584 |   | FOR |   | 14,424 |   | WITHHELD |   |
| E.  Paul DeTray           |   | 1,700,273 |   | FOR |   | 33,735 |   | WITHHELD |   |
| Jewell  Manspeaker        |   | 1,709,849 |   | FOR |   | 24,159 |   | WITHHELD |   |
| Lawrence  (Larry) Schorno |   | 1,712,011 |   | FOR |   | 21,997 |   | WITHHELD |   |

 

The term for these Directors will expire in 2005

 

Other continuing Directors are:

 
| Patrick  L. Martin   |   | Term Expiring in 2003 |
|----------------------|--------|-----------------------|
| Ken  F. Parsons      |   | Term Expiring in 2003 |
| A.  Richard Panowicz |   | Term Expiring in 2004 |

 

**Item 6****     Exhibits and Reports on Form 8-K**

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

 

16

----

 

**FIRSTCOMMUNITY 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.

 

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

 

17

----