**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

**(markone)**

**ý****QUARTERLY REPORT UNDER SECTION 13 OR 15(d)**

**OF THE SECURITIES EXCHANGE ACT OF1934**

** **

**Forthe quarterly period ended March 31, 2003**

 

**OR**

 

**o****TRANSITION REPORT UNDER SECTION 13 or 15(d)**

**OF THE SECURITIES EXCHANGE ACT OF1934**

** **

**Forthe transition period from              to              **

 

**CommissionFile Number     0-24024**

 

**First Community Financial Group,Inc.**

(Exact name of registrantas 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. Box3800, Lacey, WA  98509**

(Address of principal executive offices)

 

Issuer’s telephonenumber:    **(360) 459-1100**

 

Indicate by checkmark whether 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:              ý  Yes  o  No

 

Indicateby check mark whether the registrant is an accelerated filer (as defined byRule 12b-2 of the Exchange Act)     Yes  o  ý  No

 

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

 

| **Title of Class** |   | **Outstanding at April 30, 2003** |
|--------------------|--------|-----------------------------------|
| Common Stock       |   | 4,386,936                         |

 

 

----

 

**First Community Financial Group, Inc.**

 

Table of Contents

 

PART I - FINANCIALINFORMATION

 
| 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 |
|                        |                                                                                        |
| Item  3                     | Quantitative  and Qualitative Disclosures about Market Risk                                 |
|                        |                                                                                        |
| Item 4                      | Disclosure  Controls and Procedures                                                         |
|                        |                                                                                        |
| PART II - OTHER INFORMATION |
|                        |                                                                                        |
| Item 6                      | Exhibits and  Reports on Form 8-K                                                           |
|                        |                                                                                        |
| SIGNATURES                  |
|                        |                                                                                        |
| CERTIFICATIONS              |

 

2

----

 

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

Condensed Consolidated Balance Sheets (Unaudited)

 

*(Dollars in thousands)*

 
|                                                                                                                    |   | **March 31  2003** |        | **December 31  2002** |       |
|-------------------------------------------------------------------------------------------------------------------------|--------|--------------------|-------------|-----------------------|------------|
| **Assets**                                                                                                              |   |               |        |                  |       |
| Cash  and due from banks                                                                                                |   | $                  | 22,572      |                  | $          | 30,965 |   |
| Interest  bearing deposits in banks                                                                                     |   | 66                 |        | 76                    |       |
| Federal  funds sold                                                                                                     |   | 7,500              |        | 7,000                 |       |
| Securities  available for sale                                                                                          |   | 32,435             |        | 33,622                |       |
| Securities  held to maturity                                                                                            |   | 505                |        | 505                   |       |
| FHLB  Stock                                                                                                             |   | 1,109              |        | 877                   |       |
| Loans  held for sale                                                                                                    |   | 10,162             |        | 7,432                 |       |
|                                                                                                                    |   |               |        |                  |       |
| Loans                                                                                                                   |   | 358,971            |        | 362,132               |       |
| Allowance  for credit losses                                                                                            |   | 8,216              |        | 7,947                 |       |
| **Net  loans**                                                                                                          |   | **350,755**        | ** **  | **354,185**           | ** ** |
|                                                                                                                    |   |               |        |                  |       |
| Premises  and equipment                                                                                                 |   | 11,137             |        | 11,141                |       |
| Foreclosed  real estate                                                                                                 |   | 4,785              |        | 4,899                 |       |
| Accrued  interest receivable                                                                                            |   | 1,930              |        | 1,884                 |       |
| Cash  surrender value of life insurance                                                                                 |   | 8,966              |        | 8,863                 |       |
| Intangible  assets                                                                                                      |   | 11,680             |        | 11,708                |       |
| Other  assets                                                                                                           |   | 1,319              |        | 1,293                 |       |
|                                                                                                                    |   |               |        |                  |       |
| **Total  assets**                                                                                                       |   | **$**              | **464,921** | ** **            | **$**      | **474,450** | ** ** |
|                                                                                                                    |   |               |        |                  |       |
| **Liabilities**                                                                                                         |   |               |        |                  |       |
| Deposits:                                                                                                               |   |               |        |                  |       |
| Demand                                                                                                                  |   | $                  | 75,598      |                  | $          | 82,267 |   |
| Savings  and interest bearing demand                                                                                    |   | 161,052            |        | 156,031               |       |
| Time  deposits                                                                                                          |   | 136,165            |        | 145,909               |       |
| **Total  deposits**                                                                                                     |   | **372,815**        | ** **  | **384,207**           | ** ** |
|                                                                                                                    |   |               |        |                  |       |
| Short  term borrowing                                                                                                   |   | 17,607             |        | 16,547                |       |
| Long  term debt                                                                                                         |   | 23,000             |        | 24,000                |       |
| Accrued  interest payable                                                                                               |   | 292                |        | 315                   |       |
| Other  liabilities                                                                                                      |   | 5,866              |        | 5,172                 |       |
| **Total  liabilities**                                                                                                  |   | **419,580**        | ** **  | **430,241**           | ** ** |
|                                                                                                                    |   |               |        |                  |       |
| **Stockholders’  Equity**                                                                                          |   |               |        |                  |       |
| Common stock, (no par value); 10,000,000 shares  authorized,   shares issued: 2003 - 4,392,798; 2002 -   4,389,236 |   | 28,033             |        | 28,430                |       |
|                                                                                                                    |
| Retained  earnings                                                                                                      |   | 16,808             |        | 15,246                |       |
| Accumulated  other comprehensive income, net of tax                                                                     |   | 500                |        | 533                   |       |
| **Total stockholders’  equity**                                                                                    |   | **45,341**         | ** **  | **44,209**            | ** ** |
|                                                                                                                    |   |               |        |                  |       |
| **Total  liabilities and stockholders’ equity**                                                                    |   | **$**              | **464,921** | ** **            | **$**      | **474,450** | ** ** |

 

*See notes to condensed consolidatedfinancial statements*

 

3

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

Condensed Consolidated Statements of Income andComprehensive Income (Unaudited)

** **

*(Dollarsin thousands, except per share amounts)*

 
|                                                                                    |   | **Three  months ended  March 31** |       |
|-----------------------------------------------------------------------------------------|--------|-----------------------------------|------------|
|                                                                                    |   | **2003**                          |       | **2002** |   |
|                                                                                    |   |                              |       |   |   |
| **Interest  income**                                                                    |   |                              |       |   |   |
| Loans                                                                                   |   | $                                 | 7,883      |   | $ | 6,629 |   |
| Federal  funds sold and deposits in banks                                               |   | 2                                 |       | 2 |   |
| Securities                                                                              |   | 351                               |       | 305 |   |
| **Total  interest income**                                                              |   | **8,236**                         | ** ** | **6,936** | ** ** |
| **Interest  Expense**                                                                   |   |                              |       |   |   |
| Deposits                                                                                |   | 1,260                             |       | 1,645 |   |
| Other                                                                                   |   | 358                               |       | 71 |   |
| **Total  interest expense**                                                             |   | **1,618**                         | ** ** | **1,716** | ** ** |
| **Net  interest income**                                                                |   | **6,618**                         | ** ** | **5,220** | ** ** |
| **Provision  for credit losses**                                                        |   | **577**                           | ** ** | **621** | ** ** |
| **Net  interest income after provision for credit losses**                              |   | **6,041**                         | ** ** | **4,599** | ** ** |
| **Non-interest  income**                                                                |   |                              |       |   |   |
| Service charges  on deposit accounts                                                    |   | 920                               |       | 723 |   |
| Origination fees  on mortgage loans sold                                                |   | 858                               |       | 557 |   |
| Other operating  income                                                                 |   | 788                               |       | 536 |   |
| **Total non-interest income**                                                           |   | **2,566**                         | ** ** | **1,816** | ** ** |
| **Non-interest  expense**                                                               |   |                              |       |   |   |
| Salaries  and employee benefits                                                         |   | 3,146                             |       | 2,265 |   |
| Occupancy  and equipment                                                                |   | 803                               |       | 642 |   |
| Other  expense                                                                          |   | 2,031                             |       | 1,502 |   |
| **Total  non-interest expense**                                                         |   | **5,980**                         | ** ** | **4,409** | ** ** |
| **Operating  income before income taxes**                                               |   | **2,627**                         | ** ** | **2,006** | ** ** |
| Income  Taxes                                                                           |   | 845                               |       | 627 |   |
|                                                                                    |   |                              |       |   |   |
| **Net  income**                                                                         |   | **$**                             | **1,782**  | ** ** | **$** | **1,379** | ** ** |
|                                                                                    |   |                              |       |   |   |
| **Other  comprehensive income, net of tax:**                                            |   |                              |       |   |   |
| Unrealized  holding losses on securities arising during the period                      |   | (33                               | )          | (264 | ) |
|                                                                                    |   |                              |       |   |   |
| **Comprehensive  Income**                                                               |   | **$**                             | **1,749**  | ** ** | **$** | **1,115** | ** ** |
|                                                                                    |   |                              |       |   |   |
| **Earnings  per Share Data**                                                            |   |                              |       |   |   |
| **Basic  earnings per share**                                                           |   | **$**                             | **.41**    | ** ** | **$** | **.32** | ** ** |
| **Diluted  earnings per share**                                                         |   | **$**                             | **.39**    | ** ** | **$** | **.31** | ** ** |
|                                                                                    |   |                              |       |   |   |
| Dividends  declared per share                                                           |   | $                                 | 0.05       |   | $ | 0.05 |   |
|                                                                                    |   |                              |       |   |   |
| Weighted  average number of common shares outstanding                                   |   | 4,381,610                         |       | 4,374,186 |   |
|                                                                                    |   |                              |       |   |   |
| Weighted  average number of common shares outstanding, Including dilutive stock options |   | 4,562,704                         |       | 4,384,819 |   |
|                                                                                    |   |                              |       |   |   |
| Return  on average assets                                                               |   | 1.52                              | %          | 1.50 | % |

 

*See notes to condensed consolidatedfinancial statements*

 

4

----

 

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

Condensed Consolidated Statements of Stockholders’Equity (Unaudited)

 

*(Dollars in thousands)*

 

Three Months Ended March 31, 2002 and 2003

 
|                                  |   | **Common  Stock** |       | **Retained  Earnings** |       | **Accumulated  Other  Comprehensive  Income (Loss)** |       | **Unearned  KSOP  Shares** |       | **Total**  |       |
|---------------------------------------|--------|-------------------|------------|------------------------|------------|------------------------------------------------------|------------|----------------------------|------------|------------|------------|
|                                  |   |              |       |                   |       |                                                 |       |                       |       |       |       |
| Balance,  December 31, 2001           |   | $                 | 28,596     |                   | $          | 9,912                                                |       | $                          | 312        |       | $          | (25 | ) | $ | 38,795 |   |
|                                  |   |              |       |                   |       |                                                 |       |                       |       |       |       |
| Net  income                           |   | —            |       | 1,379                  |       | —                                               |       | —                     |       | 1,379      |       |
|                                  |   |              |       |                   |       |                                                 |       |                       |       |       |       |
| Stock  options exercised              |   | 17                |       | —                 |       | —                                               |       | —                     |       | 17         |       |
|                                  |   |              |       |                   |       |                                                 |       |                       |       |       |       |
| Cash  dividend ($0.05 per share)      |   | —            |       | (219                   | )          | —                                               |       | —                     |       | (219       | )          |
|                                  |   |              |       |                   |       |                                                 |       |                       |       |       |       |
| Other  comprehensive loss             |   | —            |       | —                 |       | (264                                                 | )          | —                     |       | (264       | )          |
|                                  |   |              |       |                   |       |                                                 |       |                       |       |       |       |
| Net  decrease in unearned KSOP shares |   | *—*          | * *   | *—*               | * *   | *—*                                             |       | 25                         |       | 25         |       |
|                                  |   |              |       |                   |       |                                                 |       |                       |       |       |       |
| **Balance,  March 31, 2002**          |   | **$**             | **28,613** | ** **             | **$**      | **11,072**                                           | ** ** | **$**                      | **48**     | ** ** | **$**      | **0** | ** ** | **$** | **39,733** | ** ** |
|                                  |   |              | ** ** |                   | ** ** |                                                 | ** ** |                       | ** ** |       | ** ** |
| **Balance,  December 31, 2002**       |   | **$**             | **28,430** | ** **             | **$**      | **15,246**                                           | ** ** | **$**                      | **533**    | ** ** | **$**      | **0** | ** ** | **$** | **44,209** | ** ** |
|                                  |   |              |       |                   |       |                                                 |       |                       |       |       |       |
| Net  income                           |   | —            |       | 1,782                  |       | —                                               |       | —                     |       | 1,782      |       |
|                                  |   |              |       |                   |       |                                                 |       |                       |       |       |       |
| Stock  options exercised              |   | 778               |       | —                 |       | —                                               |       | —                     |       | 778        |       |
|                                  |   |              |       |                   |       |                                                 |       |                       |       |       |       |
| Stock  repurchased                    |   | (1,175            | )          | —                 |       | —                                               |       | —                     |       | (1,175     | )          |
|                                  |   |              |       |                   |       |                                                 |       |                       |       |       |       |
| Cash  dividend ($0.05 per share)      |   | —            |       | (220                   | )          | —                                               |       | —                     |       | (220       | )          |
|                                  |   |              |       |                   |       |                                                 |       |                       |       |       |       |
| Other  comprehensive loss             |   | —            |       | —                 |       | (33                                                  | )          | —                     |       | (33        | )          |
|                                  |   |              |       |                   |       |                                                 |       |                       |       |       |       |
| **Balance,  March 31, 2003**          |   | **$**             | **28,033** | ** **             | **$**      | **16,808**                                           | ** ** | **$**                      | **500**    | ** ** | **$**      | **0** | ** ** | **$** | **45,341** | ** ** |

 

*See notes to condensed consolidated financialstatements*

 

5

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

Condensed Consolidated Statements of Cash Flows(Unaudited)

 

*(Dollars in thousands)*

 
|                                                                               |   | **Three  months ended March 31** |       |
|------------------------------------------------------------------------------------|--------|----------------------------------|------------|
|                                                                               |   | **2003**                         |       | **2002** |   |
|                                                                               |   |                             |       |   |   |
| **Cash  Flows from Operating Activities**                                          |   |                             |       |   |   |
| Net  Income                                                                        |   | $                                | 1,782      |   | $ | 1,379 |   |
| Adjustments  to reconcile net income to net cash provided by operating activities: |   |                             |       |   |   |
| Provision  for credit losses                                                       |   | 577                              |       | 621 |   |
| Depreciation  and amortization                                                     |   | 353                              |       | 302 |   |
| Amortization  of other intangible assets                                           |   | 28                               |       | — |   |
| Other  - net                                                                       |   | 306                              |       | (1,060 | ) |
| Originations  of loans held for sale                                               |   | (37,351                          | )          | (22,667 | ) |
| Proceeds  from sales of loans held for sale                                        |   | 34,621                           |       | 23,992 |   |
| **Net  cash provided by operating activities**                                     |   | **316**                          | ** ** | **2,567** | ** ** |
|                                                                               |   |                             |       |   |   |
| **Cash  Flows from Investing Activities**                                          |   |                             |       |   |   |
| Net  decrease in interest bearing deposits in banks                                |   | 10                               |       | 11 |   |
| Net  increase in Federal funds sold                                                |   | (500                             | )          | — |   |
| Proceeds  from maturities and prepayments of available-for-sale securities         |   | 1,108                            |       | 739 |   |
| Purchase  of securities available for sale                                         |   | —                           |       | (2,424 | ) |
| Purchase  of FHLB stock                                                            |   | (215                             | )          | — |   |
| Net  decrease in loans                                                             |   | 2,853                            |       | 757 |   |
| Proceeds  from sale of other real estate                                           |   | 333                              |       | — |   |
| Additions  to premises and equipment                                               |   | (349                             | )          | (86 | ) |
| **Net  cash provided (used) by investing activities**                              |   | **3,240**                        | ** ** | **(1,003** | **)** |
|                                                                               |   |                             |       |   |   |
| **Cash  Flows from Financing Activities**                                          |   |                             |       |   |   |
| Net  decrease in deposits                                                          |   | (11,392                          | )          | (3,409 | ) |
| Net  increase in short-term borrowings                                             |   | 1,060                            |       | 10,287 |   |
| Sale  of common stock                                                              |   | 778                              |       | 17 |   |
| Repurchase  of common stock                                                        |   | (1,175                           | )          | — |   |
| Repayment  of long-term borrowings                                                 |   | (1,000                           | )          | (25 | ) |
| Payment  of cash dividends                                                         |   | (220                             | )          | (219 | ) |
| **Net  cash provided (used) by financing activities**                              |   | **(11,949**                      | **)**      | **6,651** | ** ** |
|                                                                               |   |                             |       |   |   |
| **Net  change in cash and due from banks**                                         |   | **(8,393**                       | **)**      | **8,215** | ** ** |
|                                                                               |   |                             |       |   |   |
| **Cash  and Due from Banks:**                                                      |   |                             |       |   |   |
| Beginning  of period                                                               |   | 30,965                           |       | 21,383 |   |
|                                                                               |   |                             |       |   |   |
| **End of  period**                                                                 |   | **$**                            | **22,572** | ** ** | **$** | **29,598** | ** ** |
|                                                                               |   |                             |       |   |   |
| **Supplemental  Disclosures of Cash Flow Information:**                            |   |                             |       |   |   |
| **Cash  payments for:**                                                            |   |                             |       |   |   |
| Interest                                                                           |   | $                                | 1,641      |   | $ | 1,832 |   |
| Taxes                                                                              |   | —                           |       | 200 |   |
|                                                                               |   |                             |       |   |   |
| **Supplemental  Disclosures of Non-Cash Investing and Financing Activities:**      |   |                             |       |   |   |
| Decrease  in unearned KSOP shares                                                  |   | —                           |       | (25 | ) |
| Fair  value adjustment of securities available for sale, net                       |   | (33                              | )          | (264 | ) |

 

*See notes to condensed consolidatedfinancial statements*

 

6

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

Notes to Consolidated Financial Statements

(Unaudited)

 

**1.****                                      Basisof Presentation**

 

The accompanyingunaudited consolidated financial statements have been prepared in accordancewith accounting principles generally accepted in the United States of Americafor interim financial information and with instructions to Form 10-Q and Rule10-01 of Regulation S-X.  Accordingly,they do not include all of the information and footnotes required by accountingprinciples generally accepted in the United States of America for completefinancial statements.  In the opinion ofmanagement, adjustments considered necessary for a fair presentation(consisting of normally recurring accruals) have been included.  The interim condensed consolidated financialstatements should be read in conjunction with the December 31, 2002consolidated financial statements, including notes thereto, included in theCompany’s 2002 Annual Report to Shareholders. Operating results for the three months ended March 31, 2003 are notnecessarily indicative of the results anticipated for the year ending December31, 2003.

 

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

 

In December 2002,the Financial Accounting Standards Board issued FASB Statement No. 148, *Accountingfor Stock-Based Compensation – Transition and Disclosure. *This Statement amends FASBStatement No. 123, *Accounting for Stock-Based Compensation,*andAPB Opinion No. 28, *Interim Financial Reporting,*to providealternative methods of transition for a voluntary change to the fair valuebased method of accounting for stock-based employee compensation.  This statement does not require any changefrom the method currently used by the Company to account for stock-basedcompensation, but does require more prominent disclosure in the annual andinterim financial statements about the method of accounting for suchcompensation and the effect of the method used on reported results.  This statement was effective for fiscalyears ending after December 15, 2002. The Company has adopted the disclosure provisions of SFAS No. 148 in theaccompanying financial statements, and accordingly, the disclosure requirementsare set forth in Note 4 – Stock Based Compensation.

 

**2.****                                      Basicand Diluted Earnings per Share**

 

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

 
|                                                      |      | **Three  Months Ended March 31,** |      |
|-----------------------------------------------------------|-----------|-----------------------------------|-----------|
|                                                      |      | **2003**                          |      | **2002** |   |
|                                                      |      |                              |      |   |   |
| Basic  EPS computation   Numerator - Net Income           |      |                              |      |   |   |   |   |
| $                                                         | 1,782,000 | $                                 | 1,379,000 |   |
|                                                      |      |                              |      |   |   |
| Denominator  - Weighted Average common shares outstanding |      | 4,381,610                         |      | 4,374,186 |   |
|                                                      |      |                              |      |   |   |
| Basic  EPS                                                |      | $                                 | .41       |   | $ | .32 |   |
|                                                           |           |                                   |           |  |  |  |  |  |  |

 

7

----

 
|                                                         |   | **Three  Months Ended March 31,** |      |
|--------------------------------------------------------------|--------|-----------------------------------|-----------|
|                                                         |   | **2003**                          |      | **2002** |   |
|                                                         |   |                              |      |   |   |
| Diluted  EPS computation  Numerator - Net Income             |   | $                                 | 1,782,000 |   | $ | 1,379,000 |   |
|                                                         |   |                              |      |   |   |
| Denominator  - Weighted average common shares outstanding    |   | 4,381,610                         |      | 4,374,186 |   |
|                                                         |   |                              |      |   |   |
| Effect  of dilutive stock options                            |   | 181,094                           |      | 10,633 |   |
|                                                         |   |                              |      |   |   |
| Weighted  average common shares and common stock equivalents |   | 4,562,704                         |      | 4,384,819 |   |
|                                                         |   |                              |      |   |   |
| Diluted  EPS                                                 |   | $                                 | .39       |   | $ | .31 |   |

 

**3.             Issuanceof Trust Preferred Securities**

 

On April10, 2003, the Company completed an offering of trust preferred securities andreceived net proceeds of approximately $5,910,000.  The proceeds are expected to be used for general Companypurposes, which may include utilization in a stock repurchase program or toprovide additional capital to First Community Bank.  Trust preferred securities consist of the issuance ofsubordinated debt securities to a wholly owned subsidiary business trust, whichthen issues preferred stock to investors. The wholly owned subsidiary trust will be consolidated in theConsolidated Financial Statements.  Theinterest payments on the debt securities are approximately equal to thedividend payments on the preferred stock of the trust.  The Company will be able to recognize adeduction of the interest cost for income tax purposes, while the net proceedswill qualify as Tier 1 capital.

 

**4.             Stock-Based Compensation**

 

TheCompany accounts for stock-based awards to employees and directors using theintrinsic value method, in accordance with APB No. 25, *Accounting for Stock Issued toEmployees*.  Accordingly, nocompensation expense has been recognized in the consolidated financialstatements for employee and director stock arrangements where the grant priceis equal to market price.  However, therequired pro forma disclosures of the effects of all options granted on orafter January 1, 1995**have been provided in accordance withSFAS No. 123, *Accounting for Stock-Based Compensation*.

 

At March 31, 2003, the Company has two stock-based employee and directorcompensation plans.  The Companyaccounts for those plans under the recognition and measurement principles ofAPB Opinion No. 25 *Accounting for Stock Issued to Employees,*and related interpretations. Accordingly, no stock-based compensation cost is reflected in net incomeas all options granted under those plans had an exercise price equal to themarket value of the underlying common tock on the date of grant.  The following illustrates the effect on netincome and earnings per share if the Company had applied the fair valuerecognition provisions of SFAS No. 123, *Accounting for Stock-Based Compensation,*tostock-based compensation awards for the effects of all options granted on orafter January 1, 1995 for the years ended December 31:

 
|                                                                                                      |   | **2003** |       | **2002**   |   |
|-----------------------------------------------------------------------------------------------------------|--------|----------|------------|------------|--------|
|                                                                                                      |   |     |       |       |   |
| Net income, as reported                                                                                   |   | $        | 1,782      |       | $      | 1,379 |   |
| Less total stock-based compensation expense determined under fair  value method for all qualifying awards |   | 4        |       | 3          |   |
|                                                                                                      |   |     |       |       |   |
| **Pro forma net income**                                                                                  |   | **$**    | **1,778**  | ** ** | **$**  | **1,376** | ** ** |
|                                                                                                      |   |     |       |       |   |
| **Earnings  per Share**                                                                                   |   |     |       |       |   |
| Basic:                                                                                                    |   |     |       |       |   |
| As reported                                                                                               |   | $        |  0.41 |       | $      |  0.32 |   |
| Pro forma                                                                                                 |   | 0.41     |       | 0.31       |   |
| Diluted:                                                                                                  |   |     |       |       |   |
| As reported                                                                                               |   | 0.39     |       | 0.31       |   |
| Pro forma                                                                                                 |   | 0.39     |       | 0.31       |   |

 

8

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**5.****                                      RecentAccounting Pronouncements**

 

In January 2003, FASB issued Interpretation No. 46, *Consolidation of Variable InterestEntities*(VIE).  It define aVIE as a corporation, partnership, trust, or any other legal structure used forthe business purpose that either a) does not have equity investors with votingrights or b) has equity investors that do not provide sufficient financialresources for the entity to support its activities.  This interpretation will require a VIE to be consolidated by acompany if that company is subject to a majority of the risk of loss from theVIE’s activities or entitled to receive a majority of the entity’s residualreturn.  The provisions ofinterpretation No. 46 are required to be applied immediately to VIE’s createdafter January 31, 2003.  The Companydoes not have any VIE and accordingly the implementation of the Interpretationdid not result in an impact on its financial position or results of operation.

 

9

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**Item 2                    ****Management’s Discussion and Analysisof Financial Condition and Results of Operations**

 

The following discussion contains a review ofthe Company’s and its subsidiaries operating results and financial conditionfor the first quarter of 2003.  Whenwarranted, comparisons are made to the same period in 2002, and to the previousyear ended December 31, 2002.  Thediscussion should be read in conjunction with the financial statements(unaudited) and related notes contained elsewhere in this report.  The reader is assumed to have access to theCompany’s Form 10-K for the year ended December 31, 2002, which containsadditional statistics and explanations. All numbers, except per share data, are expressed in thousands.

 

Forward-Looking Information

 

In addition to historical information,statements appearing in this report which are not historical in nature,including the discussions of the adequacy of the Company’s capital resourcesand allowance for credit losses, are forward-looking statements within themeaning of the Private Securities Litigation Reform Act of 1995 (“PLSRA”).  Any statements that expressly or implicitlypredict future results, performance, or events should be consideredforward-looking.  Forward-lookingstatements are subject to the risks and uncertainties that may cause actualfuture results to differ materially. Readers are cautioned not to place undue reliance on theseforward-looking statements, which speak only as of the date of this AnnualReport.  The Company does not undertakeany obligation to publicly release any revisions to forward-looking statementscontained in this Quarterly Report, with respect to events or circumstancesafter the date of this Report, or to reflect the occurrence of unanticipatedevents.

 

Such risks and uncertainties with respect tothe Company include, among others, those related to the general economicenvironment, particularly in the region in which the Company operates,competitive products and pricing, that may lead to pricing pressures on rates theBank charges on loans and pays on deposits, loss of customers of greatest valueto the Bank, or other losses, fiscal and monetary policies of the federalgovernment, changes in government regulations affecting financial institutionsand small loan practices, including regulatory fees and capital requirements,changes in prevailing interest rates that could lead to decreased net interestmargin, acquisitions and the integration of acquired businesses, credit riskmanagement and asset/liability management, the financial and securitiesmarkets, changes in technology or required investments in technology, and theavailability of and costs associated with sources of liquidity.

 

**Financial Condition**

 

General

 

The Company’sconsolidated total assets at March 31, 2003 of $464,921,000 represents a 2.0%decrease from December 31, 2002 assets of $474,450,000.  The decrease in assets was primarily causedby a decrease of cash in banks of nearly $8.4 million and a decrease in loansof $3.1 Million.  This was partially offsetby an increase in loans held for sale of $2.8 million.  Other assets were largely unchanged.   Loan balances, net of allowance for creditlosses, decreased $3,400,000 in the first quarter to $350,755,000 from$354,185,000 at December 31, 2002.

 

Loans

 

The composition of theloan portfolio is as follows (dollars in thousands):

 

|         |   | **March 31  2003** |    | **December  31  2002** |   |
|--------------|--------|--------------------|---------|------------------------|--------|
|         |   |               |    |                   |   |
| Commercial   |   | $                  | 60,603  |                   | $      | 64,716 |   |
| Real  Estate |   |               |    |                   |   |
| Mortgage     |   | 212,161            |    | 207,346                |   |
| Construction |   | 69,401             |    | 70,385                 |   |
| Consumer     |   | 9,842              |    | 10,718                 |   |
| Small  Loans |   | 6,964              |    | 8,967                  |   |
| Total  Loans |   | $                  | 358,971 |                   | $      | 362,132 |   |

 

10

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The total non-performing loans, defined asthose loans on non-accrual and accruing loans over 90-days past due, increasedsince December 31, 2002 by $1,834,000 as shown in the following table ofnon-performing assets (dollars in thousands):

 
|                                     |   | **March 31  2003** |   | **December  31  2002** |   |
|------------------------------------------|--------|--------------------|--------|------------------------|--------|
|                                     |   |               |   |                   |   |
| Non-accrual  loans                       |   | $                  | 7,074  |                   | $      | 6,543 |   |
| Accruing  loans past due 90 days or more |   | 2,581              |   | 1,278                  |   |
| Foreclosed  real estate                  |   | 4,785              |   | 4,899                  |   |
| Other  assets                            |   | 99                 |   | 55                     |   |
|                                     |   | $                  | 14,539 |                   | $      | 12,775 |   |

 

Non-accrual loans increased $531,000 during the first quarter of2003.  Accruing loans past due 90 daysor more increased $1,303,000 over the same period, centered in one loan of$1,689,000, for a warehouse facility located in Pierce County, Washington, thatwent over 90 days past due during the quarter. Accruing loans past due 90 days or more are well secured and in theprocess of collection for the accrual of interest to continue.  These loans are monitored and may bereclassified as non-accrual as conditions warrant.  The percentage of non-performing loans to total loans increasedto 2.69% on March 31, 2003 from 2.16% on December 31, 2002.

 

Allowance for Credit Losses

 

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 reviewing the composition of the loanportfolio at March 31, 2003, the levels of classified loans, losses experiencedduring the period, and the changes in the economy, management has determinedthe allowance for credit losses to be adequate to cover the loss exposure inthe loan portfolio at that date.  Ananalysis of the adequacy of the allowance is subject to quarterly review by theBoard of Directors.

 

The allowance for credit losses increased $269,000 in the first quarterof 2003, with the ratio of the allowance for credit losses to total loans at2.28% on March 31, 2003, compared to 2.19% on December 31, 2002.  During the quarter an additional $577,000was reserved for potential losses, and net charge-offs were $308,000, or 0.08%of the loan portfolio.  The charge-offswere centered in the Bank’s small loan portfolio.  Non-performing loans equated to 117.5% of the allowance forcredit losses on March 31, 2003, compared to 98.4% on December 31, 2002.  Management believes the allowance is at anappropriate level.

 

Investment Portfolio

 

Investment securitiesdecreased by $1,187,000, or 3.5% during the first quarter of 2003 to a total of$32,940,000.    The decrease ininvestment balances is due to maturity and prepayments on securities in theportfolio.  Although no securities werepurchased during the first quarter, securities are purchased from time to time aseither collateral for various operational purposes or for additional income intimes of excess liquidity.

 

Deposits and Borrowings

 

Total deposits decreased$11,392,000, or 3.0% in the three months ended March 31, 2003 to$372,815,000.  Increases were shown insavings and interest-bearing deposits while demand deposits and time depositsexperienced decreases.  Short termborrowings have also been used as a funding source due to their relatively lowcost as compared to time deposits. Short term borrowings increased during the quarter by $1,060,000 to$17,607,000.

 

Liquidity

 

Liquidity managementinvolves the ability to meet cash flow requirements of customers who may beeither depositors wanting to withdraw funds or borrowers needing assurance thatsufficient funds will be available to meet their credit needs.  Liquidity is generated from both internaland external sources.  Internal sourcesare those assets that can be

 

11

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converted to cash withlittle 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, 2003, cash, deposits in banks, federal funds soldand securities available for sale totaled $62,573,000.  External sources refer to the ability toattract new liabilities and capital.  Theyinclude increasing savings and demand deposits, federal funds purchased, borrowingsand the issuance of capital and debt securities.  At March 31, 2003, borrowing lines of credit totaled$46,148,000.  These credit facilitiesare being used regularly as a source of funds. At March 31, 2003, $10,000,000was borrowed against these lines of credit in the form of long term advances.

 

Cashflows from operations contribute significantly to liquidity as well as proceedsfrom maturities of securities, a decrease in loans outstanding and increase inshort-tem borrowings.  As indicated onthe Company’s Condensed Consolidated Statement of Cash Flows, net cash fromoperating activities for the three months ended March 31, 2003 contributed$316,000 to liquidity compared to $2,567,000 for the three months ended March31, 2002.  The majority of the Company’sfunding comes from short-term borrowings. Short-term borrowings provided $1,060,000 for the three months endedMarch 31, 2003 compared to $10,287,000 for the three months ended March 31,2002.

 

Management believes theBank’s liquidity position at March 31, 2003, was adequate to meet its shortterm funding requirements.

 

Capital

 

Consolidated capital ofthe Company increased $1,132,000 during the first quarter of 2003.  The net income for the first quarter and itscorresponding increase to retained earnings was the primary component of thisincrease along with the exercising of stock options, which added $778,000.  Capital decreases were the result of$1,175,000 worth of stock being repurchased and retired, the quarterly cashdividend paid to shareholders in the amount of $220,000 and a reduction in the**marketvalue of securities available for sale of $33,000 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, 2003, the Company’s leverageratio was 10.13%, compared to 11.60% at year-end 2002.  In addition, banks and holding companies arerequired to meet minimum risk-based capital guidelines under which riskpercentages are assigned to various categories of assets and off-balance-sheetitems to calculate a risk-adjusted capital ratio.  Tier I capital generally consists of common stockholders’ equity,less goodwill, while total capital includes the allowance for possible creditlosses, subject to 1.25% limitation of risk-adjusted assets.  The rules require Tier I capital of 4% ofrisk-adjusted assets and total capital of 8%. At March 31, 2003, the Company’s Tier I capital ratio was 10.75%, andtotal capital was 12.01%.  At December31, 2002 the Company’s Tier I capital ratio was 10.23% and the total capitalratio was 11.49%.

** **

**Issuanceof Trust Preferred Securities**

 

On April 10, 2003, the Company completed an offering of trust preferredsecurities and received net proceeds of approximately $5,910,000.  The proceeds are expected to be used forgeneral Company purposes, which may include utilization in a stock repurchaseprogram or to provide additional capital to First Community Bank.  Trust preferred securities consist of theissuance of subordinated debt securities to a wholly owned subsidiary businesstrust, which then issues preferred stock to investors.  The wholly owned subsidiary trust will beconsolidated in the Consolidated Financial Statements.  The interest payments on the debt securitiesare approximately equal to the dividend payments on the preferred stock of thetrust.  The Company will be able torecognize a deduction of the interest cost for income tax purposes, while thenet proceeds will qualify as Tier 1 capital.

 

**Results of Operations**

 

General

 

Net income for the threemonths ended March 31, 2003 was $1,782,000, compared to $1,379,000 for thethree months ended March 31, 2002.

 

Net interest incomeincreased $1,398,000, an increase of 26.8% for the three months ended March 31,2003 over the same period for 2002.  Theincrease in the Company’s net interest income is primarily the result of thereduction in

12

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interest rates, andcorresponding reduction in cost of funds. The Company’s small loan product also impacted the growth in netinterest income for the quarter.    Thisproduct’s contribution to net interest income grew to $1,432,000 in the firstquarter of 2003 from $1,156,000 in the first quarter of 2002, a $276,000 increase.

 

The average volumes ofboth earning assets, primarily loans, and interest bearing liabilities,deposits, increased significantly due to the acquisition of Harbor Bank, N.A.in the fourth quarter of 2002.  Theimpact of this acquisition on average balances is evident in the year to yearcomparisons for the first quarters of 2002 and 2003.

 

Interest income for thethree months ended March 31, 2003 increased $1,300,000, or 18.7%, from the sameperiod of the prior year.   Increasedvolume of earning assets provided an additional $4,121,000 of interest income,which was partially offset by the $2,821,000 reduction in interest income dueto the reduced earnings rate of these assets.  Average earning assets for the first three months of 2003 were$89,815,000, or 28.6% higher than in the same period of 2002.  The average rate earned on assets decreasedfrom 8.95% in the first quarter of 2002 to 8.27% for the same period of 2003, adecrease of 68 basis points.

 

Total interest expensefor the three months ended March 31, 2003 decreased $98,000, or 5.7%, from thecomparable period of the prior year. The decrease in the interest rate paid on deposits and borrowings, whichdeclined 66 basis points, to 1.89% in the first quarter of 2003 from 2.55% inthe first quarter of 2002, resulted in a reduction to interest expense of$1,372,000.  Of this amount, $1,274,000was offset by an increase in the volume of these liabilities, which rose froman average of $273,003,000 in 2002 to $347,831,000 in 2003.

 

Net interest margin,defined as net interest income as a percentage of average earning assets,decreased by 10 basis points to 6.64% from 6.74% in the first quarter of 2003compared to the same period in 2002.

 

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):

 
|                                                                    |   | **2003**             |    | **2002**                        |   |
|-------------------------------------------------------------------------|--------|----------------------|---------|---------------------------------|--------|
|                                                                    |   | **Average  Balance** |    | **Interest  Income  (Expense)** |   | **Average  Rates** |   | **Average  Balance** |   | **Interest  Income  (Expense)** |   | **Average  Rates** |   |
|                                                                    |   |                 |    |                            |   |   |   |   |   |   |   |   |   |
| Earning  Assets:                                                        |   |                 |    |                            |   |   |   |   |   |   |   |   |   |
| Loans  (Interest and fees)                                              |   | $                    | 370,528 |                            | $      | 7,883 |   | 8.63 | % | $ | 293,042 |   | $ | 6,629 |   | 9.17 | % |
| Federal  funds sold                                                     |   | 650                  |    | 2                               |   | 1.25 | % | 224 |   | 2 |   | 1.81 | % |
| Investment  securities                                                  |   | 32,895               |    | 351                             |   | 4.33 | % | 20,992 |   | 305 |   | 5.91 | % |
| Total  earning assets and interest income                               |   | $                    | 404,073 |                            | $      | 8,236 |   | 8.27 | % | $ | 314,258 |   | $ | 6,936 |   | 8.95 | % |
|                                                                    |   |                 |    |                            |   |   |   |   |   |   |   |   |   |
| Interest  bearing liabilities:                                          |   |                 |    |                            |   |   |   |   |   |   |   |   |   |
| Deposits:                                                               |   |                 |    |                            |   |   |   |   |   |   |   |   |   |
| Savings,  NOW, and Money Market Deposits                                |   | $                    | 157,611 |                            | $      | (381 | ) | 0.98 | % | $ | 129,040 |   | $ | (411 | ) | 1.29 | % |
| Time  deposits                                                          |   | 142,638              |    | (879                            | )      | 2.50 | % | 130,535 |   | (1,234 | ) | 3.83 | % |
|                                                                    |   |                 |    |                            |   |   |   |   |   |   |   |   |   |
| Total  interest bearing deposits                                        |   | $                    | 300,249 |                            | $      | (1,260 | ) | 1.70 | % | $ | 259,575 |   | $ | (1,645 | ) | 2.57 | % |
|                                                                    |   |                 |    |                            |   |   |   |   |   |   |   |   |   |
| Other  borrowings                                                       |   | 47,582               |    | (358                            | )      | 3.05 | % | 13,428 |   | (71 | ) | 2.14 | % |
| Total interest bearing liabilities and interest  expense                |   | $                    | 347,831 |                            | $      | (1,618 | ) | 1.89 | % | $ | 273,003 |   | $ | (1,716 | ) | 2.55 | % |
|                                                                    |   |                 |    |                            |   |   |   |   |   |   |   |   |   |
| Net  interest income                                                    |   |                 |    | $                               | 6,618  |   |   |   |   |   | $ | 5,220 |   |   |   |
|                                                                    |   |                 |    |                            |   |   |   |   |   |   |   |   |   |
| Net interest margin as a percent percentage of  average earning assets: |   |                 |    |                            |   | 6.64 | % |   |   |   |   | 6.74 | % |

 

13

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An analysis of the changein net interest income is as follows for the three months ended March 31(dollars in thousands):

 
|                                      |   | **2003  compared to 2002  Increase (decrease) due to** |   |
|-------------------------------------------|--------|--------------------------------------------------------|--------|
|                                      |   | **Volume**                                             |   | **Rate** |   | **Net** |   |
| Interest  earned on:                      |   |                                                   |   |   |   |   |   |
|                                      |   |                                                   |   |   |   |   |   |
| Loans                                     |   | $                                                      | 3,636  |   | $ | (2,382 | ) | $ | 1,254 |   |
|                                      |   |                                                   |   |   |   |   |   |
| Federal  funds sold and deposits in banks |   | 3                                                      |   | (2 | ) | 1 |   |
|                                      |   |                                                   |   |   |   |   |   |
| Investment  securities                    |   | 482                                                    |   | (437 | ) | 45 |   |
|                                      |   |                                                   |   |   |   |   |   |
| Total  interest income                    |   | 4,121                                                  |   | (2,821 | ) | 1,300 |   |
|                                      |   |                                                   |   |   |   |   |   |
| Interest  paid on:                        |   |                                                   |   |   |   |   |   |
|                                      |   |                                                   |   |   |   |   |   |
| Savings,  NOW and MMA                     |   | 370                                                    |   | (400 | ) | (30 | ) |
|                                      |   |                                                   |   |   |   |   |   |
| Time  deposits                            |   | 658                                                    |   | (1,013 | ) | (355 | ) |
|                                      |   |                                                   |   |   |   |   |   |
| Other  borrowings                         |   | 246                                                    |   | 41 |   | 287 |   |
|                                      |   |                                                   |   |   |   |   |   |
| Total  Interest expense                   |   | 1,274                                                  |   | (1,372 | ) | (98 | ) |
|                                      |   |                                                   |   |   |   |   |   |
| Net  interest income                      |   | $                                                      | 2,847  |   | $ | (1,449 | ) | $ | 1,398 |   |

 

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, 2003 was $750,000, or 41.3% greater than the sameperiod for 2002.  Service charges,primarily due to the increased relationships generated from the addition ofHarbor Bank in the fourth quarter of 2002, increased $197,000, or 27.2%, overthe first quarter of 2002.  Originationfees on mortgage loans sold continued a strong performance, increasing by$301,000, or 54.0% over the same period in 2002.  The increase in other income was due to a $219,000 gain on thesale of other real estate owned and a $32,000 increase in debit card revenues.

 

Non-interest expenses forthe first quarter of 2003 increased by $1,571,000, or 35.6% over the firstquarter of 2002.  Salaries and employeebenefits increased by $881,000, or 38.9%, reflecting the additional employeesrelated to the Harbor Bank acquisition as well as increased commissioncompensation associated with the large increase in origination fees on mortgageloans.  Occupancy expense which reflectsthe operation of the additional branches not in operation for the same periodin 2002 increased $161,000, or 25.1%. Other expense increased by $529,000, or 35.2% from the prior year, dueto increased operational costs associated with the new branches and consultingcosts associated with developing our brand strategy.

** **

**Business Segment Reporting**

 

The Company is managedalong two major lines of business; community banking, its core business, andthe small loan division, which was entered into in the fourth quarter of2000.  Community Banking consists of alllending, deposit and administrative operations conducted through its 21 officesin Washington State.  The small loandivision provides small, short-term consumer loans to customers in Alabama andArkansas.

 

Prior to 2001, theCompany was managed as a whole, not by discrete operating segments.  When the Company began offering small loans,its operating results were segregated in the General Ledger system to bettermanage financial performance.  Thefinancial performance of the business lines is measured by the Company’sprofitability

 

14

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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 organizationalstructure of the Company and its business line financial results are notnecessarily comparable across companies. As such, the Company’s business line performance may not be directlycomparable with similar information from other financial institutions.

 

Selected comparativefinancial information for community banking and the small loan division, whichare included in the overall financial results, as of and for the three monthsended March 31, are as follows (dollars in thousands):

 
| **Three months ended March 31, 2003**                  |   | **Community  Banking** |    | **Small  Loans** |   | **Total** |   |
|--------------------------------------------------------|--------|------------------------|---------|------------------|--------|-----------|--------|
|                                                   |   |                   |    |             |   |      |   |
| Net Interest  income after provision for credit losses |   | $                      | 4,886   |             | $      | 1,155     |   | $ | 6,041 |   |
| Non-interest  income                                   |   | 2,550                  |    | 16               |   | 2,566     |   |
| Non-interest  expense                                  |   | 5,817                  |    | 163              |   | 5,980     |   |
| Income taxes                                           |   | 502                    |    | 343              |   | 845       |   |
| Net Income                                             |   | $                      | 1,117   |             | $      | 665       |   | $ | 1,782 |   |
| Total assets                                           |   | $                      | 450,087 |             | $      | 14,834    |   | $ | 464,921 |   |
| Total Loans                                            |   | $                      | 352,007 |             | $      | 6,964     |   | $ | 358,971 |   |

 
| **Three months ended March 31, 2002**                  |   | **Community  Banking** |    | **Small  Loans** |   | **Total** |   |
|--------------------------------------------------------|--------|------------------------|---------|------------------|--------|-----------|--------|
|                                                   |   |                   |    |             |   |      |   |
| Net Interest  income after provision for credit losses |   | $                      | 3,914   |             | $      | 685       |   | $ | 4,599 |   |
| Non-Interest  income                                   |   | 1,798                  |    | 18               |   | 1,816     |   |
| Non-Interest  expense                                  |   | 4,204                  |    | 205              |   | 4,409     |   |
| Income taxes                                           |   | 477                    |    | 150              |   | 627       |   |
| Net Income                                             |   | $                      | 1,031   |             | $      | 348       |   | $ | 1,379 |   |
| Total assets                                           |   | $                      | 354,221 |             | $      | 17,930    |   | $ | 372,151 |   |
| Total Loans                                            |   | $                      | 282,508 |             | $      | 5,123     |   | $ | 287,631 |   |

 

**Item 3     Quantitative and Qualitative Disclosure About Market Risk**

 

**Rate Sensitivity**

 

The Company’s assets andliabilities are managed to maximize long-term shareholder returns by optimizingnet interest income within the constraints of maintaining high credit quality,conservative interest rate risk disciplines and prudent levels ofliquidity.  The Asset/LiabilityCommittee meets regularly to monitor the composition of the balance sheet, toassess current and projected interest rate trends, and to formulate strategiesconsistent with established objectives for liquidity, interest rate risk andcapital adequacy.

 

Interest rate sensitivityis closely related to liquidity, as each is directly affected by the maturityof assets and liabilities.  TheCompany’s net interest margin is affected by changes in the level of marketinterest rates.  Management’s objectivesare to monitor and control interest rate risk and ensure predictable andconsistent growth in net interest income.

 

Management considers anyasset or liability which matures, or is subject to repricing within one year tobe interest sensitive, although continual monitoring is performed for othertime intervals as well.  The differencebetween interest sensitive assets and liabilities for a defined period of timeis known as the interest sensitivity “gap”, and may be either positive ornegative.  If positive, more assetsreprice before liabilities.  Ifnegative, the reverse is true.  Gapanalysis provides a general measure of interest rate risk but does not addresscomplexities such as prepayment risk, interest rate floors and ceilings imposedon financial instruments, interest rate dynamics and customer responses tointerest rate changes.  Currently theBank’s interest sensitivity gap is negative within one year.  Assuming that general market interest ratechanges affected the repricing of assets and liabilities in equal magnitudes,this indicates that the effects of rising interest rates on the Company wouldbe a decrease in the net interest margin, whereas falling interest rates would causea corresponding increase in the margin.

 

15

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**Interest Rate Gap AnalysisMarch 31, 2003**

** **
| **(dollars in thousands)**            |   | **Within  One Year** |     | **After One  But Within  Five Years** |   | **After  Five Years** |   | **Total** |    |
|---------------------------------------|--------|----------------------|----------|---------------------------------------|--------|-----------------------|--------|-----------|---------|
|                                  |   |                 |     |                                  |   |                  |   |      |    |
| Loans                                 |   | $                    | 157,971  |                                  | $      | 155,536               |   | $         | 45,464  |   | $ | 358,971 |   |
| Securities:                           |   |                 |     |                                  |   |                  |   |      |    |
| Available  for sale                   |   | 4,514                |     | 18,842                                |   | 8,417                 |   | 31,773    |    |
| Held  to maturity                     |   | —               |     | 505                                   |   | —                |   | 505       |    |
| Federal  funds sold                   |   | 7,500                |     | —                                |   | —                |   | 7,500     |    |
| Interest  bearing deposits with banks |   | 66                   |     | —                                |   | —                |   | 66        |    |
| Total  Earning Assets                 |   | $                    | 170,051  |                                  | $      | 174,883               |   | $         | 53,881  |   | $ | 398,815 |   |
|                                  |   |                 |     |                                  |   |                  |   |      |    |
| Deposits:                             |   |                 |     |                                  |   |                  |   |      |    |
| Savings,  NOW and money market        |   | $                    | 161,052  |                                  | — |                  | — |      | $       | 161,052 |   |
| Time  deposits                        |   | 103,188              |     | $                                     | 32,977 |                  | — |      | 136,165 |   |
| Short-term  borrowings                |   | 17,607               |     | —                                |   | —                |   | 17,607    |    |
| Long-term  debt                       |   | —               |     | 10,000                                |   | 13,000                |   | 23,000    |    |
|                                  |   |                 |     |                                  |   |                  |   |      |    |
| Total  Interest Bearing Liabilities   |   | $                    | 281,847  |                                  | $      | 42,977                |   | —    |    | $ | 337,824 |   |
|                                  |   |                 |     |                                  |   |                  |   |      |    |
| Net  Interest Rate Sensitivity Gap    |   | $                    | (111,796 | )                                     | $      | 131,906               |   | $         | 40,881  |   | $ | 60,991 |   |

 

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

 

The Company has marketrisk in the form of interest rate risk on its financial assets.  In an effort to understand the relativeimpact of this risk on the Company’s current financial situation, a process****knownas a rate shock is applied to the current financial assets.

 

Rate shock is a 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 by 100 basis points is estimated to be a reduction of$1,520,000, or 5.5% of total estimated annual net interest income, whereas adecrease of 100 basis points is estimated to increase net interest income by$1,176,000, or 4.2%.

** **

**Item4     Disclosure Controls andProcedures**

 

(a)        Evaluationof Disclosure Controls and Procedures.

 

Management of the Company, including the Chief Executive Officer andthe Principal Accounting Officer, have conducted an evaluation of the Company’sdisclosure controls and procedures in accordance with rule 13a-14 under theSecurities Exchange Act of 1934 as of a date (the “evaluation date”) within 90days prior to the filing date of this report. Based on that evaluation, the Chief Executive Officer and the PrincipalAccounting Officer have concluded that, as of the evaluation date, theCompany’s disclosure controls and procedures were effective in ensuring thatall material information relating to the Company required to be filed in thisquarterly report has been made known to them in a timely manner.

 

(b)        Changesin Internal Controls

 

Since the evaluation date, there have been no changes to the Company’sinternal controls or in other factors that could significantly affect thosecontrols.

 

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**First Community Financial Group, Inc.**

** **

**PARTII - OTHER INFORMATION**

 

**Item6****              Exhibitsand Reports on Form 8-K**

 

(a)Exhibits

 

The following exhibit isfiled herewith, and this list constitutes the exhibit index:

 

99.1 Certification of CEOand Principal Accounting Officer under Section 906 of Sarbanes-Oxley Act of2002

 

(b)Reports on Form 8-K

 

Year-end 2002 EarningsReport filed January 29, 2003

 

Stock Repurchase Programfiled March 5, 2003

 

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**First Community Financial Group, Inc.**

 

SIGNATURES

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 
|               | FIRST COMMUNITY  FINANCIAL GROUP, INC.                                                                                                                                                                                                                                                                                                                                                                       |
|--------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|               |                                                                                                                                                                                                                                                                                                                                                                                                         |
|               |                                 (Registrant)                                 |
|               |                                                                                                                                                                                                                                                                                                                                                                                                         |   |
| Date: May 14, 2003 | By:                                                                                                                                                                                                                                                                                                                                                                                                          | /s/ Ken F. Parsons |   |
|               |                                                                                                                                                                                                                                                                                                                                                                                                         |   |
|               |                                                                                                                                                                                                                                                                                                                                                                                                         | Ken F. Parsons |
|               |                                                                                                                                                                                                                                                                                                                                                                                                         |   |
|               |                                                                                                                                                                                                                                                                                                                                                                                                         | President, Chief  Executive Officer |
|               |                                                                                                                                                                                                                                                                                                                                                                                                         |   |
|               |                                                                                                                                                                                                                                                                                                                                                                                                         |   |
|               | By:                                                                                                                                                                                                                                                                                                                                                                                                          | /s/ Catherine M. Reines |   |
|               |                                                                                                                                                                                                                                                                                                                                                                                                         |   |
|               |                                                                                                                                                                                                                                                                                                                                                                                                         | Catherine M. Reines |
|               |                                                                                                                                                                                                                                                                                                                                                                                                         |   |
|               |                                                                                                                                                                                                                                                                                                                                                                                                         | Chief Financial Officer |
|               |                                                                                                                                                                                                                                                                                                                                                                                                         |   |
|               |                                                                                                                                                                                                                                                                                                                                                                                                         |   |
|               | By:                                                                                                                                                                                                                                                                                                                                                                                                          | /s/ Thomas L. Dhamers |   |
|               |                                                                                                                                                                                                                                                                                                                                                                                                         |   |
|               |                                                                                                                                                                                                                                                                                                                                                                                                         | Thomas L. Dhamers |
|               |                                                                                                                                                                                                                                                                                                                                                                                                         |   |
|               |                                                                                                                                                                                                                                                                                                                                                                                                         | Principal Accounting  Officer |
|                    |                                                                                                                                                                                                                                                                                                                                                                                                              |  |  |  |

 

18

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**CERTIFICATION UNDER SECTION 302**

**OFSARBANES-OXLEY ACT OF 2002**

 

I, Ken F. Parsons, Sr. certify that:

 

1. I have reviewed this quarterly report on Form 10-Qof First Community Financial Group, Inc. (the “registrant”);

 

2. Based on my knowledge, this report does not containany untrue statement of a material fact or omit to state a material factnecessary to make the statements made, in light of the circumstances underwhich such statements were made, not misleading with respect to the periodcovered by this report;

 

3. Based on my knowledge, the financial statements,and other financial information included in this report, fairly present in allmaterial respects the financial condition, results of operations and cash flowsof the registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officers and Iare responsible for establishing and maintaining disclosure controls andprocedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for theregistrant and we have:

 

a) designed suchdisclosure controls and procedures to ensure that material information relatingto the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which thisquarterly report is being prepared;

 

b) evaluated theeffectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this report (the “EvaluationDate”); and

 

c) presented in thisreport our conclusions about the effectiveness of the disclosure controls andprocedures based on our evaluation as of the Evaluation Date;

 

5. The registrant’s other certifying officers and Ihave disclosed, based on our most recent evaluation, to the registrant’sauditors and the audit committee of registrant’s board of directors (or personsperforming the equivalent function):

 

a) all significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b) any fraud, whether ornot material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

 

6. The registrant’s other certifying officers and I haveindicated in this report whether or not there were significant changes ininternal controls or in other factors that could significantly affect internalcontrols subsequent to the date of our most recent evaluation, including anycorrective actions with regard to significant deficiencies and materialweaknesses.

 
| Date May 14, 2003 | /s/ Ken F. Parsons, Sr.                                 |   |
|-------------------|---------------------------------------------------------|--------|
|              | Ken F. Parsons, Sr.  President, Chief Executive Officer |

 

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**CERTIFICATION UNDER SECTION 302**

**OF SARBANES-OXLEYACT OF 2002**

 

I, Catherine M. Reines certify that:

 

1. I have reviewed this quarterly report on Form 10-Qof First Community Financial Group, Inc. (the “registrant”);

 

2. Based on my knowledge, this report does not containany untrue statement of a material fact or omit to state a material factnecessary to make the statements made, in light of the circumstances underwhich such statements were made, not misleading with respect to the periodcovered by this report;

 

3. Based on my knowledge, the financial statements,and other financial information included in this report, fairly present in allmaterial respects the financial condition, results of operations and cash flowsof the registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officers and Iare responsible for establishing and maintaining disclosure controls andprocedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for theregistrant and we have:

 

a) designed suchdisclosure controls and procedures to ensure that material information relatingto the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which thisquarterly report is being prepared;

 

b) evaluated theeffectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this report (the “EvaluationDate”); and

 

c) presented in thisreport our conclusions about the effectiveness of the disclosure controls andprocedures based on our evaluation as of the Evaluation Date;

 

5. The registrant’s other certifying officers and Ihave disclosed, based on our most recent evaluation, to the registrant’sauditors and the audit committee of registrant’s board of directors (or personsperforming the equivalent function):

 

a) all significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b) any fraud, whether ornot material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

 

6. The registrant’s other certifying officers and Ihave indicated in this report whether or not there were significant changes ininternal controls or in other factors that could significantly affect internalcontrols subsequent to the date of our most recent evaluation, including anycorrective actions with regard to significant deficiencies and materialweaknesses.

 
| Date May 14, 2003 | /s/ Catherine M. Reines |   |
|-------------------|-------------------------|--------|
|              | Catherine M. Reines     |
|              | Chief Financial Officer |

 

20

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**CERTIFICATIONUNDER SECTION 302**

**OFSARBANES-OXLEY ACT OF 2002**

 

I, Thomas L. Dhamers certify that:

 

1. I have reviewed this quarterly report on Form 10-Qof First Community Financial Group, Inc. (the “registrant”);

 

2. Based on my knowledge, this report does not containany untrue statement of a material fact or omit to state a material factnecessary to make the statements made, in light of the circumstances underwhich such statements were made, not misleading with respect to the period coveredby this report;

 

3. Based on my knowledge, the financial statements,and other financial information included in this report, fairly present in allmaterial respects the financial condition, results of operations and cash flowsof the registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officers and Iare responsible for establishing and maintaining disclosure controls andprocedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrantand we have:

 

a) designed suchdisclosure controls and procedures to ensure that material information relatingto the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which thisquarterly report is being prepared;

 

b) evaluated theeffectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this report (the “EvaluationDate”); and

 

c) presented in thisreport our conclusions about the effectiveness of the disclosure controls andprocedures based on our evaluation as of the Evaluation Date;

 

5. The registrant’s other certifying officers and Ihave disclosed, based on our most recent evaluation, to the registrant’sauditors and the audit committee of registrant’s board of directors (or personsperforming the equivalent function):

 

a) all significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b) any fraud, whether ornot material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

 

6. The registrant’s other certifying officers and Ihave indicated in this report whether or not there were significant changes ininternal controls or in other factors that could significantly affect internalcontrols subsequent to the date of our most recent evaluation, including anycorrective actions with regard to significant deficiencies and materialweaknesses.

 
| Date May 14, 2003 | /s/ Thomas L. Dhamers        |   |
|-------------------|------------------------------|--------|
|              | Thomas L. Dhamers            |
|              | Principal Accounting Officer |

 

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