**UNITED STATES****SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-Q/A**

 
| **(mark  one)**                                                                                                                                                                            |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **ý****QUARTERLY REPORT UNDER  SECTION 13 OR 15(d)  OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                          |
|                                                                                                                                                                                       |
| **For  the quarterly period ended March 31, 2002**                                                                                                                                         |
|                                                                                                                                                                                       |
| **OR**                                                                                                                                                                                     |
|                                                                                                                                                                                       |
| **o****TRANSITION REPORT UNDER  SECTION 13 or 15(d)  OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                              |
|                                                                                                                                                                                       |
| **For  the transition period from               to              ** |
|                                                                                                                                                                                       |
| **Commission  File Number 0-24024**                                                                                                                                                        |

 

| **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)                                         |
|                                                                              |   |   |
| 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                         |

 

 

----

 

**FirstCommunity Financial Group, Inc.**

 

Table of Contents

 
| PART I - FINANCIAL  INFORMATION |
|---------------------------------|
|                            |   |
| Item 1                          | Financial Statements |
|                            | Condensed Consolidated Balance Sheets |
|                            | Condensed  Consolidated Statements of Income and Comprehensive Income |
|                            | Condensed 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

----

 

**FIRSTCOMMUNITY FINANCIAL GROUP, INC. and SUBSIDIARIES**

Condensed Consolidated BalanceSheets (Unaudited)

 

*(Dollars in thousands)*

 
|                                                                                                                                            |   | **March 312002** |        | **December  312001** |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------|-------------|----------------------|--------|
|                                                                                                                                            |   |             |        |                 |   |
| **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                                                                                                                              |   | 6,268            |        | 6,268                |   |
| Other  assets                                                                                                                                   |   | 913              |        | 801                  |   |
|                                                                                                                                            |   |             |        |                 |   |
| **Total assets**                                                                                                                                |   | **$**            | **372,151** |                 | **$**  | **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                                                                                                                              |   | 3,957            |        | 4,104                |   |
| **Total liabilities**                                                                                                                           |   | **332,418**      |        | **325,828**          |   |
|                                                                                                                                            |   |             |        |                 |   |
| **Stockholders’ Equity**                                                                                                                   |   |             |        |                 |   |
| Common  stock, par value $2.50 per share;   10,000,000 shares authorized, 2,188,497 shares issued in 2002, and 2,186,681  shares issued in 2001 |   | 5,471            |        | 5,467                |   |
| Additional  paid-in capital                                                                                                                     |   | 23,142           |        | 23,129               |   |
| Retained  earnings                                                                                                                              |   | 11,072           |        | 9,912                |   |
| Accumulated  other comprehensive income                                                                                                         |   | 48               |        | 312                  |   |
| Unearned  KSOP shares                                                                                                                           |   | 0                |        | (25                  | )      |
| **Total stockholders’ equity**                                                                                                             |   | **39,733**       |        | **38,795**           |   |
|                                                                                                                                            |   |             |        |                 |   |
| **Total liabilities and stockholders’ equity**                                                                                             |   | **$**            | **372,151** |                 | **$**  | **364,623** |   |

 

See notes to condensedconsolidated financial statements

 

3

----

 

**FIRSTCOMMUNITY FINANCIAL GROUP, INC. and SUBSIDIARIES**

Condensed Consolidated Statementsof Income and Comprehensive Income (Unaudited)

 

*(Dollarsin 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 |   |
| Other  expense                                                                          |   | 1,502                             |       | 1,353 |   |
| **Total non-interest expense**                                                          |   | **4,409**                         |       | **4,119** |   |
| **Operating income before income taxes**                                                |   | **2,006**                         |       | **1,559** |   |
| Income  Taxes                                                                           |   | 627                               |       | 488 |   |
|                                                                                    |   |                              |       |   |   |   |   |
| **Net income**                                                                          |   | **$**                             | **1,379**  |   | **$** | **1,071** |   |
|                                                                                    |   |                              |       |   |   |
| **Other comprehensive income, net of tax:**                                             |   |                              |       |   |   |
| Unrealized  holding gains (losses) on securities arising during the period              |   | (264                              | )          | 490 |   |
|                                                                                    |   |                              |       |   |   |
| **Comprehensive Income**                                                                |   | **$**                             | **1,115**  |   | **$** | **1,561** |   |
|                                                                                    |   |                              |       |   |   |
| **Earnings Per Share Data**                                                             |   |                              |       |   |   |
| **Basic earnings per share**                                                            |   | **$**                             | **.63**    |   | **$** | **.49** |   |
| **Diluted earnings per share**                                                          |   | **$**                             | **.62**    |   | **$** | **.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                                                               |   | 1.50                              | %          | 1.29 | % |

 

*Seenotes to condensed consolidated financial statements*

 

4

----

 

**FIRSTCOMMUNITY FINANCIAL GROUP, INC. and SUBSIDIARIES**

Condensed Consolidated Statements of Stockholders’ Equity(Unaudited)

 

*(Dollarsin thousands)*

 
|                                  |   | **Three  Months Ended March 31, 2001 and 2002** |      |                               |   |                   |       |
|---------------------------------------|--------|-------------------------------------------------|-----------|------------------------------------|--------|------------------------|------------|
|                                  |   | **Common  Stock**                               |      | **Additional****Paid-in  Capital** |   | **Retained  Earnings** |       | **AccumulatedOtherComprehensive  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                           |   | —                                          |      | —                             |   | 1,379                  |       | — |   | — |   | 1,379 |   |
|                                  |   |                                            |      |                               |   |                   |       |   |   |   |   |   |   |
| 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** | ** **                         | **$**  | **23,142**             | ** ** | **$** | **11,072** | ** ** | **$** | **48** | ** ** | **$** | **0** | ** ** | **$** | **39,733** | ** ** |

 

*Seenotes to condensed consolidated financial statements*

 

5

----

 

**FIRSTCOMMUNITY FINANCIAL GROUP, INC. and SUBSIDIARIES**

Condensed Consolidated Statementsof Cash Flows (Unaudited)

 

*(Dollarsin thousands)*

 
|                                                                               |   | **Three  months ended March 31** |       |
|------------------------------------------------------------------------------------|--------|----------------------------------|------------|
|                                                                               |   | **2002**                         |       | **2001** |   |
|                                                                               |   |                             |       |   |   |
| **Cash Flows from Operating Activities**                                           |   |                             |       |   |   |
| Net  Income                                                                        |   | $                                | 1,379      |   | $ | 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                                           |   | 0                                |       | 103 |   |
| Other  - net                                                                       |   | (1,060                           | )          | 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 |   |

 

*Seenotes to condensed consolidated financial statements*

 

6

----

 

**FIRSTCOMMUNITY FINANCIAL GROUP, INC. and SUBSIDIARIES**

Notes to ConsolidatedFinancial Statements

(Unaudited)

 

**1.****                                      Basis ofPresentation**

 

The accompanying unaudited consolidated financial statements have beenprepared in accordance with  accountingprinciples generally accepted in the United States of America for interimfinancial information and with instructions to Form 10-Q and Rule 10-01 ofRegulation S-X.  Accordingly, they donot 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, 2001 consolidatedfinancial statements, including notes thereto, included in the Company’s 2001Annual 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 of financial statements in conformity with accountingprinciples generally accepted in the United States of America requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities and disclosure of contingent assets and liabilitiesat the date of the financial statements and the reported amounts of revenuesand expenses during the reporting period. Actual results could differ from those estimates.

 

**2.****                                      Basic and DilutedEarnings 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               |   | $                                 | 1,379,000 |   | $ | 1,071,000 |   |
|                                                         |   |                              |      |   |   |
| Denominator  - Weighted Average common shares outstanding    |   | 2,187,093                         |      | 2,175,130 |   |
|                                                         |   |                              |      |   |   |
| Basic  EPS                                                   |   | $                                 | .63       |   | $ | .49 |   |
|                                                         |   |                              |      |   |   |
| Diluted  EPS computation  Numerator - Net Income             |   | $                                 | 1,379,000 |   | $ | 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                                                 |   | $                                 | .62       |   | $ | .48 |   |

 

7

----

 

**3.****                                      Recent AccountingPronouncements**

 

The Financial Accounting Standards Board adopted Financial AccountingStandards No. 141, Business Combinations, and 142, Goodwill and OtherIntangible Assets, in 2001.  SFAS No.141 requires that all business combinations entered into after June 30, 2001 beaccounted 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 plans to complete its transitionalassessment of goodwill impairment before June 30, 2002.  Other identifiable intangible assets, andcertain unidentifiable intangible assets arising from certain acquisitions,will continue to be amortized using the same lives and methods.  The Company has $4,159,000 of goodwill onwhich amortization has ceased effective January 1, 2002 which resulted in areduction of amortization expense of $69,000 in the quarter ended March 31,2002.  The remaining intangible assetsof $2,059,000 will continue to be amortized.

 

In June 2001, the FASB also issued SFAS No. 143, *Accounting for Asset RetirementObligations*.  This statementaddresses financial accounting and reporting obligations associated with theretirement of tangible long-lived assets and the associated annual retirementcosts.  This statement is effective forall fiscal years beginning after June 15, 2002.  In August 2001 the FASB issued SFAS No. 144, *Accounting for the Impairment orDisposal of Long-Lived Assets*. The statement addresses financial accounting and reporting for theimpairment or disposal of long-lived assets. This statement is effective for fiscal years beginning after December15, 2001.  The Company does notanticipate that the adoption of SFAS Nos. 143 and 144 will have a materialeffect on its financial position or results of operations.

 

8

----

 

**Management’sDiscussion****andAnalysis of 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.

 

**FinancialCondition**

 

Overview

 

The Company’s consolidated total assets at March 31, 2002 of$372,151,000 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 ofnon-performing loans (non-accrual and loans over 90 days past due) hasincreased since December 31, 2001, as shown in the following table ofnon-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 loans decreased by $778,000 during the first quarter of2002.  Accruing loans past due 90 daysor more increased $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.  Foreclosed realestate has increased by $724,000 from prior year end.   The percentage of non-performing loans to total loans decreasedto 0.52% from 0.73% at December 31, 2001.

 

The allowance for credit losses reflects management’s current estimateof the amount required to absorb losses on existing loans and commitments toextend credit.  Determination of theappropriate level of the allowance is based on an analysis of various factorsincluding historical loss experience based on volumes and types of loans;volumes and trends in delinquencies and non-accrual loans; trends in portfoliovolume; results of internal and independent external credit reviews; andeconomic conditions.  All loans in theportfolio are assigned a grade indicating credit quality by the originatingloan officer at the time of loan origination. These grades are reviewed at regular intervals and, if performanceconcerns arise on an individual loan, the grade is lowered to the appropriatelevel.  Management reviews the compositechanges in loan grades within the portfolio in its assessment of the adequacyof the allowance.  If a loan becomesimpaired, the Company’s loss exposure on that loan is measured based onexpected cash flows or collateral values, and if necessary, a portion of theallowance for credit losses is allocated to that loan.  After

 

9

----

 

reviewing the composition of the loan portfolio at March 31, 2002, thelevels 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 ofthe allowance is subject to quarterly review by the Board of Directors.

 

The allowance for credit losses increased $308,000 in the first quarterof 2002.  The ratio of allowance forcredit losses to total loans increased during the first quarter of 2002 to1.53% from 1.42% at December 31, 2001. The dollar value change in the allowance consisted of $621,000 ofprovision less $313,000 in net charge-offs of loans.  Charge-offs were concentrated in the Company’s small loanportfolio.  The allowance for creditlosses increased even though the loan quality improved as a ratio ofnon-performing loans to total loans. This is not the result of any identified problem with the loanportfolio, rather it is a general allowance to the economic conditions thecontinue to persist in the national economy. While there are signs of increasing economic recovery, it has been slowand relatively inconsistent.  TheCompany considers the level of allowance to be at the upper range for thecurrent level of loan portfolio quality.

 

Investment securities increased by $1,320,000, or 7.1% during the firstquarter of 2002 to a total of $19,930,000. Additional securities were purchased during the quarter primarily  as a source of collateral for the Company’soperations.

 

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 and liabilities are managed to maximize long-termshareholder returns by optimizing net interest income within the constraints ofmaintaining high credit quality, conservative interest rate risk disciplinesand prudent levels of liquidity.  TheAsset/Liability Committee meets regularly to monitor the composition of thebalance sheet, to assess current and projected interest rate trends, and toformulate strategies consistent with established objectives for liquidity,interest rate risk and capital adequacy.

 

Liquidity management involves the ability to meet cash flowrequirements of customers who may be either depositors wanting to withdrawfunds or borrowers needing assurance that sufficient funds will be available tomeet their credit needs.  Liquidity isgenerated from both internal and external sources.  Internal sources are those assets that can be converted to cashwith little or no risk of loss.  Theseinclude overnight investments in interest bearing deposits in banks and federalfunds sold and investment securities, particularly those of shorter maturity,and are the principal source of asset liquidity.  At March 31, 2002, cash, deposits in banks, federal funds soldand securities available for sale totaled $49,086,000.  External sources refer to the ability toattract new liabilities and capital. They include increasing savings and demand deposits, federal fundspurchased, borrowings and the issuance of capital and debt securities.  At March 31, 2002, borrowing lines of credittotaled $44,210,000.  These creditfacilities are being used regularly as a source of funds. At March 31, 2002,$17,342,000 was borrowed against these lines of credit in the form of federalfunds purchased and term advances.

 

Management believes the Bank’s liquidity position at March 31, 2002,was adequate to meet its short term funding requirements.

 

Interest rate sensitivity is closely related to liquidity, as each isdirectly affected by the maturity of assets and liabilities.  The Company’s net interest margin isaffected by changes in the level of market interest rates.  Management’s objectives are to monitor andcontrol interest rate risk and ensure predictable and consistent growth in netinterest income.

 

Management considers any asset or liability which matures, or issubject to repricing within one year to be interest sensitive, althoughcontinual monitoring is performed for other time intervals as well.  The difference between interest sensitiveassets and liabilities for a defined period of time is known as the interestsensitivity “gap”, and may be either positive or negative.  If positive, more assets reprice beforeliabilities.  If negative, the reverseis true.  Gap analysis provides ageneral measure of interest rate risk but does not address complexities such asprepayment risk, interest rate floors and ceilings imposed on financialinstruments, interest rate dynamics and customers’ response to interest ratechanges.  Currently the Banks’ interestsensitivity gap is negative within one year. Assuming that general market

 

10

----

 

interest rate changes affected the repricing of assets and liabilitiesin equal magnitudes, this indicates that the effects of rising interest rateson the Company would be a decrease in the net interest margin, whereas fallinginterest rates would cause a corresponding increase in the margin.

 

**InterestRate 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 risk is impacted by changes in interestrates.  Other types of market risk, suchas foreign currency exchange rate risk and commodity price risk, do not arisein the normal course of the Company’s business.

 

The Company has market risk in the form of interest rate risk on itsfinancial assets.  In an effort tounderstand the relative impact of this risk on the Company’s current financialsituation, a process known as a rate shock is applied to the current financialassets.

 

Rate shock is a process wherein the characteristics of the financialassets of the Company are reviewed in the event they are subjected to aninstantaneous and complete adjustment in the market rate of interest.  These results are modeled to determine theeffects on interest rate margin for the succeeding twelve months from therepricing of variable rate assets and liabilities where applicable.  The level of impact on the various assetsand liabilities are also estimated for their sensitivity to pricing changes ofsuch a market interest rate change. According to this model and its assumptions, the change in net interestincome over a 12 month period in the event market interest rates were toimmediately rise or fall by 100 basis points is estimated to be $480,000.  This amount represents approximately 2.3% ofthe annualized net interest income for 2002.

 

Capital

 

Consolidated capital ofFCFG increased $938,000 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 for saleof  $264,000 on an after-tax basis.

 

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 minimum“leverage” ratio (primary capital ratio) of total assets.  For the most highly rated holding companiesthis ratio must be at least 3%, and for others it must be 4 to 5%.  At March 31, 2002, the Company’s leverageratio was 9.21%, compared to 8.91%

 

11

----

 

at year-end 2001.  In addition, banks and holding companies arerequired to meet minimum risk-based capital guidelines under which risk percentagesare assigned to various categories of assets and off-balance-sheet items tocalculate a risk-adjusted capital ratio. Tier I capital generally consists of common stockholders’ equity, lessgoodwill, 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%.

 

**Resultsof Operations**

 

General

 

Net income for the three months ended March 31, 2002  was $1,379,000, compared to $1,071,000 forthe three months ended March 31, 2001.

 

Net interest income increased $888,000, an increase of 20.5% for thethree months ended March 31, 2002 over the same period for 2001.  The increase in the Company’s net interestincome is primarily the result of the reduction in interest rates, andcorresponding reduction in cost of funds. The Company’s small loan product also had a significant impact on thegrowth in net interest income for the quarter. This product’s contribution to net interest income grew to $1,156,000 inthe first quarter of 2002 from $649,000 in the first quarter of 2001, a$507,000 increase.

 

Interest income for the three months ended March 31, 2002 decreased$230,000, or 3.2%, from the same period of the prior year.   Increased volume of earning assets providedan additional $3,134,000 of interest income, which was more than offset by the$3,364,000 reduction in interest income due to the reduced earnings rate ofthese assets.  Average earning assetsfor the first three months of 2002 were $21,361,000, or 7.3% higher than in thesame period of 2001.  The average rateearned on assets decreased from 9.92% in the first quarter of 2001 to 8.95% forthe same period of 2002.  The percentageof average loans to total average earning assets increased over the prior yearand represents 93.2% of total average earning assets, up from 89.1% in2001.  The average rate of return onassets decreased 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 ofaverage earning assets, increased by 74 basis points to 6.74% from 6.00% in thefirst quarter of 2002 compared to the same period in 2001.

 

12

----

 

The yield and cost of funds for earning assets and interest bearingliabilities were as follows as of and 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                               |   | $                    | 314,2588973 |                            | $      | 6,936 |   | 8.95 | % | $ | 292,8973225 |   | $ | 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 | % | $ | 242,270006 |   | $ | (2,777 | ) | 4.65 | % |
| Other  borrowings                                                       |   | 13,428               |        | (71                             | )      | 2.14 | % | 3,414 |   | (57 | ) | 6.77 | % |
| Total  interest bearing liabilities and interest expense                |   | $                    | 273,00368   |                            | $      | (1,716 | ) | 2.55 | % | $ | 245,68460 |   | $ | (2,834 | ) | 4.68 | % |
|                                                                    |   |                 |        |                            |   |   |   |   |   |   |   |   |   |
| Net  interest income                                                    |   |                 |        | $                               | 5,220  |   |   |   |   |   | $ | 4,332 |   |   |   |
| Net  interest margin as a percent percentage of average earning assets: |   |                 |        |                            |   | 6.74 | % |   |   |   |   | 6.00 | % |

 

13

----

 

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 the relationship of the absolute dollar amounts of the change ineach.

 

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 forthe first quarter of 2002 increased by $290,000, or 7.0% over the first quarterof 2001.  Salaries and employee benefitsincreased by $66,000, or 3.0%.  Occupancy,reflecting the operation of the additional branches not in operation for thesame period in 2001, increased $75,000, or 13.2%.  Other expense increased by $149,000, or 11.0% from the prioryear, primarily due to increased operational costs associated with the newbranches and expansion of the small loan program since the first quarter of2001.  Additional business andoperational taxes, both related to increased volume in the small loan programas well as increased revenues from banking operations, increased $60,000 andcorrespondent bank fees increased $50,000.

 

**BusinessSegment Reporting**

 

The Company is managed along two major lines of business; communitybanking, its core business, and the small loan division, which was entered intoin the fourth quarter of 2000. Community Banking consists of all lending, deposit and administrativeoperations conducted through its 19 offices in Washington state.  The small loan division

 

14

----

 

provides small, short-term consumer loans to customers in Alabama andArkansas.

 

Prior to 2001, the Company was managed as a whole, not by discreteoperating segments.  When the Companybegan offering small loans, its operating results were segregated in theGeneral Ledger system to better manage financial performance.  The financial performance of the businesslines is measured by the Company’s profitability reporting process, whichutilizes various management accounting techniques to more accurately reflecteach business line’s financial results. Revenues and expenses are primarily 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 |   |

 

15

----

 

**FirstCommunity Financial Group, Inc.**

 
| **PART II - OTHER INFORMATION** |
|---------------------------------|
|                            |
| **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.

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

 

17

----