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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549



FORM 10-Q



(mark one)

(X)
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended June 30, 2002OR___
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from ______ to ______




Commission File Number 0-24024



First Community Financial Group, Inc.

Washington(State or other jurisdiction
of incorporation or organization)
91-1277503(IRS Employer Identification Number)




721 College Street SE, P.O. Box 3800, Lacey, WA  98509



Registrant's telephone number:    (360) 459-1100



Indicate by check mark whether the registrant (1) has filed all reports required to be filed by sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes     X No



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

Title of ClassCommon Stock, no stated value
Outstanding at June 30, 20022,186,584




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First Community Financial Group, Inc.

Table of Contents



PART 1 - FINANCIAL INFORMATION
PageItem 1
Financial StatementsCondensed Consolidated Balance Sheets
3Condensed Consolidated Statements of Income and Comprehensive Income
4Condensed Consolidated Statement of Stockholders' Equity
5Condensed Consolidated Statements of Cash Flows
6Notes to Condensed Consolidated Financial Statements
7Item 2
Management's Discussion of Financial Condition and Analysis or Plan of Operations
9Item 3
Quantitative and Qualitative Disclosures about Market risk
14PART 2 - OTHER INFORMATIONItem 1
Legal Proceedings
NoneItem 2
Changes in Securities and Use of Proceeds
NoneItem 3
Defaults Upon Senior Securities
NoneItem 4
Submission of Matters to Vote of Security Holders
16Item 5
Other Information
NoneItem 6
Exhibits and Reports on Form 8-K
16SIGNATURES
17




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FIRST COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARIES

(Dollars in Thousands)

June 30
2002

December 31 2001AssetsCash and due from banks
$
24,989
$
21,383Interest bearing deposits in banks

72

74Federal funds

900

0Securities available for sale

17,589

18,104Securities held to maturity

505

506Federal Home Loan Bank stock

2,044

1,985Loans held for sale

4,475

6,196Loans

292,988

288,701Allowance for credit losses

4,480

4,088Net Loans

288,508

284,613Premises and equipment

10,025

10,382Foreclosed real estate

4,789

4,387Accrued interest received

1,528

1,471Cash value of life insurance

8,554

8,453Intangible assets

6,168

6,268Other assets

1,196

801Total assets
$
371,342
$
364,623LiabilitiesDeposits:Non-interest bearing
$
54,786
$
55,013Savings and interest bearing demand

129,287

123,093Time deposits

132,282

135,624Total deposits

316,355

313,730Federal funds purchased

2,250

1,400Short term borrowing

6,429

5,655Long term debt

1,550

575Accrued interest payable

243

364Other liabilities

3,829

4,104Total Liabilities

330,656

325,828Stockholders' EquityCommon stock, no stated value per share;10,000,000 shares authorized, 2,186,584 shares issuedin 2002, and 2,186,681 shares issued in 2001

28,264

28,596Retained earnings

12,462

9,912Accumulated other comprehensive income (loss)

(40)

312Debt related to KSOP

0

(25)Total stockholders' equity

40,686

38,795Total liabilities and stockholders' equity
$
371,342
$
364,623




See notes to condensed consolidated financial statements



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FIRST COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARIES

(Dollars in thousands, except per share amounts)

Three months ended
June 30,


Six months ended
June 30,2002
2001


2002
2001Interest incomeLoans
$
6,689
7,222

$
13,318
13,924Federal funds sold and deposits in banks

2
42


4
98Investments

304
400


609
808Total interest income

6,995
7,664


13,931
14,830Interest ExpenseDeposits

1,383
2,648


3,028
5,425Other

81
107


152
164Total interest expense

1,464
2,755


3,180
5,589Net interest income

5,531
4,909


10,751
9,241Provision for credit losses

364
300


985
445Net interest income after provisionFor credit losses

5,167
4,609


9,766
8,796Non-interest incomeService charges on deposit accounts

749
482


1,472
940Origination fees on mortgage loans sold

496
475


1,053
901Other income

583
339


1,119
946Total non-interest income

1,828
1,296


3,644
2,787Non-interest expenseSalaries and employee benefits

2,370
2,368


4,635
4,567Occupancy and equipment

585
639


1,227
1,206Other expense

1,636
1,469


3,188
2,822Total non-interest expense

4,591
4,476


9,050
8,595Operating income before income taxes

2,404
1,429


4,360
2,988Income Taxes

760
437


1,370
925Net income
$
1,644
992

$
2,990
2,063Operating comprehensive income, net of taxUnrealized holding gains (losses) on securities
     arising during the period

(88)
(51)


(352)
439Comprehensive income
$
1,556
941

$
2,638
2,502Earnings per share dataBasic earnings per share
$
0.75
0.46

$
1.37
0.95Diluted earnings per share
$
0.74
0.44

$
1.35
0.92Weighted average number of common shares

2,187,728
2,178,210


2,187,412
2,177,337Weighted average number of common shares- including dilutive stock options

2,218,204
2,229,658


2,217,043
2,234,401Return on average assets

1.76%
1.14%


1.61%
1.22%Dividends per share
$
0.10
0.10

$
0.20
0.20




See notes to condensed consolidated financial statements



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FIRST COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARIES



(Dollars in thousands)

Common
Stock

Retained
Earnings

Accumulated
Other
Comprehensive
Income (Loss)

Debt
Related 
To KSOP

TotalBalance, December 31, 2000
$
28,559
$
6,349
$
(332)
$
(203)
$
34,373Net Income

--

2,063

--

--

2,063Stock options exercised

27

--

--

--

27Cash dividend ($0.20 per share)

--

(437)

--

--

(437)Other comprehensive income

--

--

439

--

439Net decrease in debt relatedTo KSOP

--

--

--

89

89Balance, June 30, 2001
$
28,586
$
7,975
$
107
$
(114)
$
36,554Balance, December 31, 2001
$
28,596
$
9,912
$
312
$
(25)
$
38,795Net income

--

2,990

--

--

2,990Stock options exercised

618

--

--

--

618Cash dividend ($0.20 per share)

--

(440)

--

--

(440)Stock repurchased

(950)

--

--

--

(950)Other comprehensive income

--

--

(352)

--

(352)Net decrease in debt relatedTo KSOP

--

--

--

25

25Balance, June 30, 2002
$
28,264
$
12,462
$
(40)
$
0
$
40,686


See notes to condensed consolidated financial statements



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FIRST COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARIESCondensed Consolidated Statements of Cash Flows (Unaudited)

(Dollars in thousands)

Six Months Ended
June 30,2002


2001Cash Flows from Operating ActivitiesNet Income
$
2,990

$
2,063Adjustments to reconcile net income to net cash provided by  (used in)Operating activities:Provision for credit losses

985


445Depreciation and amortization

583


540Amortization of intangible assets

100


205Increase in cash value of life insurance

(101)


(2)Other - net

(773)


1,221Originations of loans held for sale

(41,701)


(41,241)Proceeds from sales of loans held for sale

43,422


38,658Net cash provided by operating activities

5,505


1,889Cash Flows from Investing ActivitiesNet decrease in interest bearing deposits in banks

2


18Net increase in Federal funds sold

(900)


0Proceeds from maturities of available-for-sale securities

2,479


2,805Purchase of securities available for sale

(2,424)


0Net increase in loans

(5,607)


(17,212)Proceeds from sale of other real estate

325


164Additions 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 ActivitiesNet increase in deposits

2,625


32,273Net increase (decrease) in short-term borrowings

1,624


(6,133)Sale of common stock

618


27Repurchase of common stock

(950)


0Increase in long term borrowings

1,000


0Repayment of long-term borrowings

(25)


(89)Payment of dividends

(440)


(437)Net cash provided by financing activities

4,452


25,641Net change in cash and due from banks

3,606


7,300Cash and Due from Banks:Beginning of period

21,383


12,640End of period
$
24,989

$
19,940Supplemental Disclosures of Cash Flow Information:Cash payments for:Interest
$
3,301

$
5,661Taxes

1,415


865Supplemental Disclosures of Non-Cash Investing Activities:Other real estate acquired in settlement of loans
$
727

$
56Fair value adjustment of securities available for sale, net

(352)


439Decrease in guarantee of KSOP obligation

(25)


(89)




See notes to condensed consolidated financial statements



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FIRST COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARIES

1. Basis of Presentation

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



Three Months Ended June 30,

Six Months Ended June 30,2002

2001

2002

2001Basic EPS computation
$
1,644,000
$
992,000
$
2,990,000
$
2,063,000Numerator - Net IncomeDenominator - Weighted Averagecommon shares outstanding

2,187,728

2,178,210

2,187,412

2,177,337Basic EPS
$
.75
$
.46
$
1.37
$
.95Diluted EPS computation
$
1,644,000
$
992,000
$
2,990,000
$
2,063,000Numerator - Net IncomeDenominator - Weighted Average

2,187,728

2,178,210

2,187,412

2,177,337common shares outstandingEffect of dilutive stock options

30,476

51,448

29,631

57,064Weighted average common shares

2,218,204

2,229,658

2,217,043

2,234,401and common stock equivalentsDiluted EPS
$
.74
$
.44
$
1.35
$
.92


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1. Recent Accounting Pronouncements
2. Subsequent Events

> Acquisition of Harbor Bank, N.A.
> 
> 
>   On August 5, 2002 the Company announced the signing of a definitive agreement pursuant to which Harbor Bank, N.A. would merge with First Community Bank.  Upon completion of the transaction, Harbor Bank 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 common stock.  The per-share consideration may be reduced if Harbor Bank's Tier 1 capital plus reserve for possible loan and lease losses is less than $4,750,000 at the time of closing. The reduction in the per-share consideration would be calculated by dividing the amount by which Harbor Bank's Tier 1 capital plus loan loss reserve is below $4,750,000 by the total number of shares of Harbor Bank common stock outstanding at closing.  Each outstanding option to purchase Harbor Bank common stock will be converted into the right to receive, for each share covered by such option, cash in the amount the per-share consideration exceeds the exercise price of the option.  The Company expects to pay aggregate consideration of approximately $7.0 million.
> The boards of directors of the Company, First Community Bank and Harbor Bank have each approved the definitive agreement. Completion of the transaction is expected late in the third quarter or early in the fourth quarter of 2002 and is subject to regulatory and shareholder approval.Issuance of Trust Preferred SecuritiesOn July 11 2002, the Company completed an offering of trust preferred securities and received net proceeds 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 the issuance of subordinated debt securities to a wholly owned subsidiary business trust, which then issues preferred stock to investors.  The interest payments on the debt securities are approximately equal to the dividend payments on the preferred stock of the trust.  The Company will be able to recognize a deduction of the interest cost for income tax purposes, while the net proceeds will qualify as Tier 1 capital.



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Item 2



Management's Discussion and Analysis of Financial Condition and Results of Operations



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

Financial Condition

Overview

The Company's consolidated total assets at June 30, 2002 of $371,342,000 represents a 1.8% 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 to satisfy regulatory requirements as well as provide the operational funding of the Company's small-loan program.  The composition of the loan portfolio at June 30, 2002 and December 31, 2001 follows (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 of non-performing loans (non-accrual and loans over 90 days past due still accruing interest) and other non-performing assets has increased since December 31, 2001, as shown in the following table of non-performing assets (dollars in thousands):



|                                        |   | 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 loans increased by $412,000 during the first half of 2002.  Accruing loans past due 90 days or more increased $130,000 over the same period.  Loans in this category must be well secured and in the process of collection for the accrual of interest to continue.  These loans are monitored and may be reclassified as non-accrual as conditions warrant. Foreclosed real estate has increased 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.



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The allowance for credit losses reflects management's current estimate of the amount required to absorb losses on existing loans and commitments to extend credit.  Determination of the appropriate level of the allowance is based on an analysis of various factors including: historical loss experience based on volumes and types of loans; volumes and trends in delinquencies and non-accrual loans; trends in portfolio volume; results of internal and independent external credit reviews; and economic conditions.  All loans in the portfolio are assigned a grade indicating credit quality by the originating loan officer at the time of loan origination.  These grades are reviewed at regular intervals and, if performance concerns arise on an individual loan, the grade is lowered to the appropriate level.  Management reviews the composite changes in loan grades within the portfolio in its assessment of the adequacy of the allowance.  If a loan becomes impaired, the Company's loss exposure on that loan is measured based on expected cash flows or collateral values, and if necessary, a portion of the allowance for credit 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 the changes in the economy, management has determined the allowance for credit losses to be adequate to cover the loss exposure in the loan portfolio at that date.  An analysis of the adequacy of the allowance is subject to quarterly review by the Board of Directors.

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

Investment securities decreased by $516,000, or 2.8% during the first half of 2002 to a total of $18,094,000.    Additional securities were purchased during the first quarter primarily as a source of collateral for the 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 toward transaction accounts during the first half, with increases shown in savings and interest-bearing deposits and a smaller decrease in time deposits.  Short-term borrowings have also been used as a funding source due to their relatively low cost as compared to time deposits.  Fed funds purchased and short term borrowings increased during the first half by $1,624,000 to $8,679,000 due to their favorable cost and flexibility in managing funding.

Liquidity

Liquidity management involves the ability to meet cash flow requirements of customers who may be either depositors wanting to withdraw funds or borrowers needing assurance that sufficient funds will be available to meet their credit needs.  Liquidity is generated from both internal and external sources.  Internal sources are those assets that can be converted to cash with little or no risk of loss.  These include overnight investments in interest bearing deposits in banks and federal funds sold and investment securities, particularly those of shorter maturity, and are the principal source of asset liquidity.  At June 30, 2002, cash, deposits in banks, federal funds sold and securities available for sale totaled $43,550,000.  External sources refer to the ability to attract new liabilities and capital.  They include increasing savings and demand deposits, federal funds purchased, borrowings and the issuance of capital and debt securities.  At June 30, 2002, borrowing lines 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 the form of federal funds purchased and term advances.

Management believes the Bank's liquidity position at June 30, 2002, was adequate to meet its short term funding requirements.

Capital

Consolidated capital of FCFG increased $1,891,000 during the first half of 2002.  The increase comes primarily from net income, which increased capital by $2,990,000.  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 the securities portfolio of $352,000 were reductions to the capital total.



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There are regulatory constraints placed upon capital adequacy, and it is necessary to maintain an appropriate ratio between capital and assets.  Regulations require banks and holding companies to maintain a minimum leverage ratio (primary capital to total assets ratio).  For the most highly rated holding companies this ratio must be at least 3%, and for others it must be 4 to 5%.  At June 30, 2002, the Company's leverage ratio was 9.37%, compared to 8.91% at year-end 2001.  In addition, banks and holding companies are required to meet minimum risk-based capital guidelines under which risk percentages are assigned to various categories of assets and off-balance-sheet items to calculate a risk-adjusted capital ratio.  Tier I capital generally consists of common stockholders' equity, less goodwill, while total capital includes the allowance for possible credit losses, subject to 1.25% limitation of risk-adjusted assets.  The rules require Tier I capital of 4% of risk-adjusted assets and total capital of 8%.  At June 30, 2002, the Tier I capital ratio was 9.87%, and total capital was 11.12%.  At December 31, 2001 the Tier I capital ratio was 9.34% and the total capital ratio was 10.52%.

Issuance of Trust Preferred Securities

On July 11 2002, the Company completed an offering of trust preferred securities and received net proceeds 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 the issuance of subordinated debt securities to a wholly owned subsidiary business trust, which then issues preferred stock to investors.  The interest payments on the debt securities are approximately equal to the dividend payments on the preferred stock of the trust.  The Company will be able to recognize a deduction of the interest cost for income tax purposes, while the net proceeds will qualify as Tier 1 capital.

Results of Operations

General

Net income for the six months ended June 30, 2002 was $2,990,000, compared to $2,063,000 for the same period in 2001.  This represents a 45% increase over the prior year.   Net income for the three months ended June 30, 2002 was $1,644,000, compared to $992,000 for the three months ended June 30, 2001.  This represents a 66% increase in net income for the period.

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

Interest income for the six months ended June 30, 2002 decreased $899,000, or 6%, from the same period of the prior year.   Increased volume of earning assets provided an additional $2,728,000 of interest income, which was more than offset by the $3,627,000 reduction in interest income due to the reduced 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 decreased 114 basis points from 10.03% in the first half of 2001 to 8.89% for the same period of 2002. The percentage of average loans to total average earning assets increased over the prior year and represents 93.4% of total average earning assets, up from 89.8% in 2001.  Interest income for the three months ended June 30, 2002 was $669,000 lower than the same period in the previous year.

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



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

The yield and cost of funds for earning assets and interest bearing liabilities were as follows as of and 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
RatesEarning 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 assetsand interest income
$
315,870
$
13,931
8.89%
$
298,124
$
14,830
10.03%Interest bearing liabilities:Deposits:Savings, NOW, andMoney 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 liabilitiesand interest expense
$
274,532
$
(3,180)
2.34%
$
251,802
$
(5,589)
4.48%Net interest income


$
10,751



$
9,241Net interest margin as a percentof average earning assets:




6.86%




6.25%


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



2002 compared to 2001
Increase (decrease due toVolume

Rate

NetInterest 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




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



12

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Non-interest income increased by $857,000, or 31%, from the first half of 2001.  Service charges, primarily due to the implementation 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 sold continued their strong performance, increasing by $152,000, or 17% over the same period in 2001.  Non-interest income for the three months ended June 30, 2002 increased $532,000, or 41% over the prior year.



Non-interest expenses for the first half of 2002 increased by $455,000, or 5%, over the first half of 2001.  Compensation expense increased $68,000, or 1%.  Occupancy expenses increased $21,000, or 2%.  The other expenses increase of $366,000 included an additional $103,000 in expenses related to the operation of the small-loan program, including increased business and occupation taxes and correspondent bank fees, as well as $86,000 in expenses related to the implementation of a new overdraft product in the third quarter of 2001.  Non-interest expenses for the second quarter of 2002 increased $115,000, or 3%, over the second quarter of 2001.  The ratio of non-interest expense to average assets decreased to 4.87% for the six months ended June 30, 2002 from 5.07% in 2001.  The ratio of net overhead (non-interest expense minus non-interest income) divided by average total assets decreased to 1.46% for the six months ended June 30, 2002 from 3.42% for the same period in 2001.



Business Segment Reporting

The Company is managed along two major lines of business; Community Banking, its core business, and the small-loan division, which was entered into in the fourth quarter of 2000.  Community Banking consists of all lending, deposit and administrative operations conducted through its 19 offices in Washington state.  The small-loan division provides small, short-term consumer loans to customers in Alabama and Arkansas.

Prior to 2001, the Company 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 better manage financial performance.  The financial performance of the business lines is measured by the Company's profitability reporting process, which utilizes various management accounting techniques to more accurately reflect each business line's financial results.  Revenues and expenses are primarily assigned directly to business lines.

The organizational structure of the Company and its business line financial results are not necessarily comparable across companies.  As such, the Company's business line performance may not be directly comparable with similar information from other financial institutions.

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

Community
Banking

Small
Loans

TotalNet Interest income after provision for credit losses
$
8,194
$
1,572
$
9,766Non-interest income

3,644

--

3,644Non-interest expense

8,654

396

9,050Income taxes

980

390

1,370Net Income
$
2,204
$
786
$
2,990Total assets
$
351,284
$
20,058
$
371,342Total Loans
$
286,199
$
6,789
$
292,988




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Six Months ended June 30, 2001

Community
Banking

Small
Loans

TotalNet Interest income after provision for credit losses
$
7,693
$
1,103
$
8,796Non-Interest income

2,787

- -

2,787Non-Interest expense

8,337

258

8,595Income taxes

638

287

925Net Income
$
1,505

558

2,063Total assets
$
338,865
$
13,435
$
352,300Total Loans
$
265,489
$
6,461
$
271,950




Item 3         Quantitative and Qualitative Disclosure About Market Risk

Rate Sensitivity

> The Company's assets and liabilities are managed to maximize long-term shareholder returns by optimizing net interest income within the constraints of maintaining high credit quality, conservative interest rate risk disciplines and prudent levels of liquidity.  The Asset/Liability Committee meets regularly to monitor the composition of the balance sheet, to assess current and projected interest rate trends, and to formulate strategies consistent with established objectives for liquidity, interest rate risk and capital adequacy.
>   Interest rate sensitivity is closely related to liquidity, as each is directly affected by the maturity of assets and liabilities.  The Company's net interest margin is affected by changes in the level of market interest rates.  Management's objectives are to monitor and control interest rate risk and ensure predictable and consistent growth in net interest income.
> 
> Management considers any asset or liability which matures, or is subject to repricing within one year to be interest sensitive, although continual monitoring is performed for other time intervals as well.  The difference between interest sensitive assets and liabilities for a defined period of time is known as the interest sensitivity "gap", and may be either positive or negative.  If positive, more assets reprice before liabilities.  If negative, the reverse is true.  Gap analysis provides a general measure of interest rate risk but does not address complexities such as prepayment risk, interest rate floors and ceilings imposed on financial instruments, interest rate dynamics and customers' response to interest rate changes.  Currently the Banks' interest sensitivity gap is negative within one year.  Assuming that general market interest rate changes affected the repricing of assets and liabilities in equal magnitudes, this indicates that the effects of rising interest rates on the Company would be a decrease in the net interest margin, whereas falling interest rates would cause a corresponding increase in the margin.
> 
> 
> 
> 14

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> 

Table of Contents



Interest Rate Gap Analysis
June 30, 2002



(dollars in thousands)

Within
One Year

After One
But Within
Five Year

After
Five Years

TotalLoans
$
121,846
$
132,373
$
38,769
$
292,988Securities:Available for sale

3,314

7,010

7,265

17,589Held to maturity

--

505

--

505Interest bearing deposits with banks

72

--

--

72Fed funds sold

900

--

--

900Total Earnings Assets
$
126,132
$
139,888
$
46,034
$
312,054DepositsSavings, NOW and money market
$
129,287

--
$
--
$
129,287Time deposits

121,406
$
10,876

--

132,282Short-term borrowings

8,679

--

--

8,679Long-term debt

550

1,000

--

1,550Total Interest Bearing Liabilities
$
259,922
$
11,876

--
$
271,798Net Interest Rate Sensitivity Gap
$
(133,790)
$
128,012
$
46,034
$
40,256


> The Company's market risk is impacted by changes in interest rates.  Other types of market risk, such as foreign currency exchange rate risk and commodity price risk, do not arise in the normal course of the Company's business.
> The Company has market risk in the form of interest rate risk on its financial assets.  In an effort to understand the relative impact of this risk on the Company's current financial situation, a processknown as a rate shock is applied to the current financial assets.
> Rate shock is a process wherein the characteristics of the financial assets of the Company are reviewed in the event they are subjected to an instantaneous and complete adjustment in the market rate of interest.  These results are modeled to determine the effects on interest rate margin for the succeeding twelve months from the repricing of variable rate assets and liabilities where applicable.  The level of impact on the various assets and liabilities are also estimated for their sensitivity 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 market interest rates were to immediately rise or fall by 100 basis points is estimated to be $188,000.



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FIRST COMMUNITY FINANCIAL GROUP, INC.

PART II - OTHER INFORMATION

Item 4     Submission of Matters to Vote of Security Holders

> On May 5, 2002, the Company held it's 2002 Annual Shareholder's Meeting
> 
> Five members of the Company's Board of Director's were elected 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 2003Ken F. Parsons
> Term Expiring in 2003A. Richard Panowicz
> Term Expiring in 2004

Item 6     Exhibits and Reports on Form 8-K

(a)
Exhibits99.1 Certification of CEO and CFO(b)
Reports on Form 8-K
None




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FIRST COMMUNITY FINANCIAL GROUP, INC.



SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



Date August 14, 2002
FIRST COMMUNITY FINANCIAL GROUP, INC.
          (Registrant)


By:   /s/ Ken F. Parsons, Sr.      Ken F. Parsons, Sr.
      President, Chief Executive Officer


By:   /s/ James F. Arneson      James F. Arneson
      Executive Vice President,
      Chief Financial Officer
      (Principal Accounting Officer)




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Exhibit 99.1

CERTIFICATION OF
CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER



This certification is given by the undersigned Chief
Executive Officer and Chief Financial Officer of First Community Financial
Group, Inc. (the "Registrant") pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002. Each of the undersigned hereby certifies, with respect to the
Registrant's quarterly report of Form 10-Q for the period ended June 30, 2002 as
filed with the Securities and Exchange Commission on the date hereof (the
"Report"), that:

(1) The Report fully complies with the requirements of
section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents,
in all material respects, the financial condition and result of operations of
the Registrant.



/s/ Ken F. Parsons                   Ken F. Parsons, Sr.
President and Chief Executive Officer



/s/ James F. Arneson                James F. Arneson
Executive Vice President and Chief Financial Officer



August 14, 2002

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