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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(mark one)
/X/ Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934 (fee required)
For the Fiscal Year ended December 31, 1996
OR
/ . Transition Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
(no fee required)
For the Transition period from to
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Commission File Number 0 - 24024
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First Community Financial Group, Inc.
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(Exact name of registrant as specified in its charter)
Washington 91-1277503
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(State or other jurisdiction (IRS Employer Identification Number)
of incorporation or organization)
721 College St. S.E., P.O. Box 3800, Lacey, WA 98503
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(Address of principal executive offices)
Registrant's telephone number: (360) 459-1100
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $2.50 par value
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(Title of class)
Check whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
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Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this form 10-KSB /X/
State the issuer's revenues for its most recent fiscal year: $17,102,000
State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the
average bid and asked prices of such stock, as of a specified date within the
past 60 days: at December 31, 1996 - $25,040,000
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Number of shares of common stock outstanding as of December 31, 1996:
1,698,505
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It is the policy of First Community Financial Group, Inc. to provide
shareholders with an annual report containing audited financial statements.
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PART I
ITEM 1 - DESCRIPTION OF BUSINESS
First Community Financial Group, Inc. ("FCFG" or "the Company") was
incorporated under the laws of the State of Washington in November 1983 as
First Community Bancorp, Inc. and is a bank holding company. The company's
name was changed to First Community Financial Group in July, 1992. In 1984,
pursuant to a plan of reorganization, FCFG acquired all of the stock of First
Community Bank of Washington ("FCB"), a state banking corporation chartered
under the laws of the State of Washington in 1979.
On March 1, 1993, the Company acquired Citizens First Bank ("CFB"), a state
banking corporation chartered under the laws of the State of Washington in
1978. On December 8, 1995 CFB's banking charter was merged into First
Community Bank. The accompanying financial information was prepared following
the pooling-of-interests method of accounting and reflects the combined
financial position and operating results of FCFG and CFB for all periods
presented.
During 1993, FCFG started Information Management Systems, Inc. ("IMS"), a
wholly owned non-bank corporation formed to provide data processing services
to the Company and its subsidiaries.
On November 29, 1995, the Company acquired Northwest Community Bank ("NCB"),
a state banking corporation chartered under the laws of the State of
Washington in 1991 and merged it into FCB. The transaction provided an
exchange ratio of 5.2416 shares of FCFG's stock for each share of NCB stock.
The accompanying financial information has been prepared following the
pooling-of-interests method of accounting and reflects the combined financial
position and operating results of FCFG and NCB for all periods presented.
During 1996, Premises, Inc., a non-bank corporation formed for the purpose of
acquiring and holding properties used by FCFG's banking subsidiaries, was
merged into FCB, constructively eliminating the former corporation. FCFG was
owner of all outstanding shares of Premises, Inc.
On September 11, 1996, the Company entered into an agreement to acquire
Prairie Security Bank, a three branch bank headquartered in Yelm, Washington
with total assets of approximately $45 million. This in-market merger
allowed the Company to consolidate two branches in Yelm, as well as two in
Olympia, Washington in addition to the usual economies associated with such a
transaction. The acquisition, accounted for as a purchase, was completed on
February 6, 1997. Consequently, the accompanying financial information does
not include Prairie Security Bank's financial position or results of
operations.
During February 1997, under a Stock Purchase Agreement between the Company
and certain former directors and stockholders, the Company repurchased
122,570 shares of its stock for $2,513,000.
On March 3, 1997 the Bank was notified that it was a successful bidder in the
sale of five Wells Fargo bank branches. This acquisition, which is expected
to close early in the third quarter of the year is for approximately $45
million in deposits and includes branch facilities in Hoquiam, Montesano,
Shelton, Toledo and Winlock, Washington. The Bank has agreed to resell the
branch facility and accompanying deposits in Shelton to another financial
institution.
The principal offices of FCFG, FCB, and IMS are located in Lacey, Washington.
FCB is referred to as "The Bank".
The primary functions of FCFG are strategic planning for FCFG and its
subsidiaries, capital planning and financing, overall financial management,
marketing support for subsidiaries, management of all facility related
matters, and implementation and coordination of employee benefits. FCFG also
provides analysis of business opportunities including additional bank
services, financial analysis and trends, analysis of potential acquisitions,
and general delivery systems support such as data processing,
telecommunications, etc. to its subsidiaries.
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The Bank engages in general banking business through ten branches and a
mortgage production office in Thurston, Grays Harbor, Lewis and Pierce
Counties. The Bank's banking business includes the acceptance of demand,
time and savings deposits and the making of loans. The Bank provides a full
range of consumer banking services including: savings accounts, checking
accounts, installment and commercial lending, safety deposit facilities,
time deposits, Visa and MasterCard and other consumer and business related
financial services including the sale of non-deposit investment products.
FCB presently maintains branches in Lacey, Olympia, Tumwater, Yelm, Tacoma,
Fircrest, Centralia, Elma and Hoquiam, Washington. FCB has been
continuously located in its Lacey branch since inception. The Olympia branch
was opened in 1981. In 1990 FCB opened new branches in Tumwater and Yelm.
In 1987, FCB opened a mortgage banking office offering a broad range of home
and construction financing. During 1994 a new branch located in downtown
Olympia was opened. In 1995 FCB acquired branches in Fircrest and Tacoma
through the acquisition of NCB. FCB also has branches in Elma and Hoquiam,
which were acquired through its merger with Citizens First Bank.
Competition
The financial services industry is highly competitive. The Bank competes
actively with national and state banks, mutual savings banks, savings and
loans, finance companies, credit unions, brokerage houses and other
financial institutions operating in the service area. Many of these
financial institutions have merged or are in process of merging and many are
larger in size than the Bank.
Employees
FCFG and its subsidiaries employ a total of 126 employees, comprised of 107
full time and 19 part time employees at December 31, 1996. Such employees
are not represented by a union organization or other collective bargaining
group, and management considers their relations with their employees to be
very good.
BANK SUPERVISION AND REGULATION
The following generally refers to certain significant statutes and
regulations affecting the banking industry. These references are only
intended to provide brief summaries and therefore, are not complete and are
qualified by the statutes and regulations referenced. In addition, due to
the numerous statutes and regulations which apply to and regulate the
operation of the banking industry, many are not referenced below.
The Company
General
As a bank holding company, FCFG is subject to the Bank Holding Company Act of
1956 ("BHCA"), as amended, which places FCFG under the supervision of the
Board of Governors of the Federal Reserve System ("FRB"). In general, the
BHCA limits the business of bank holding companies to owning or controlling
banks and engaging in other activities related to banking. Certain recent
legislation designed to expand interstate branching and relax federal
restrictions on interstate banking has been phased in and may expand
opportunities for bank holding companies (for additional information see
below under the heading "The Bank - Recent Federal Legislation - Interstate
Banking and Branching"). However, the impact of this legislation on FCFG is
unclear at this time.
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Holding Company Structure
FRB Regulation. FCFG must obtain the approval of the FRB: (1) before
acquiring direct or indirect ownership or control of any voting shares of any
bank if, after such acquisition, it would own or control, directly or
indirectly, more than 5% of the bank's voting shares; (2) before merging or
consolidating with another bank holding company; and (3) before acquiring
substantially all of the assets of any additional banks. Until September of
1995, the BHCA also prohibited the acquisition by FCFG of any such interest
in any bank or bank holding company located in a state other than Washington
unless the laws of that state expressly authorized such acquisition. Now,
subject to certain state laws, such as age and contingency laws, a bank
holding company that is adequately capitalized and adequately managed may
acquire the assets of an out-of-state bank without regard to whether such
transaction is prohibited by the laws of any state.
FCFG files annual and quarterly reports and any other reports the FRB may
require from time to time. In addition, the FRB periodically examines FCFG and
its subsidiary Bank.
Holding Company Control of Nonbanks. With certain exceptions, the BHCA
prohibits bank holding companies from acquiring direct or indirect ownership or
control of voting shares in any company other than a bank or a bank holding
company unless the FRB finds the company's business activities to be incidental
to the business of banking or managing or controlling banks. When making this
determination, the FRB in part considers whether allowing a bank holding company
to engage in those activities would offer advantages to the public that would
outweigh possible adverse effects.
The Economic Growth and Regulatory Paperwork Reduction Act of 1996 ("Economic
Growth Act") amended the BHCA to eliminate the requirement that a bank
holding company seek FRB approval before engaging de novo in permissible
nonbanking activities, if the holding company is well capitalized and meets
certain other criteria specified in the statute. A bank holding company
meeting the specifications is now required only to notify the FRB within 10
business days after the activity has begun. On February 28, 1997, the FRB
issued a final rule incorporating the changes enacted by the Economic Growth
Act. Effective April 21, 1997, a well-run bank holding company, without any
prior notice or FRB approval, may commence immediately any activity that is
currently or at the time of commencement included in the FRB's list of
acceptable nonbanking activities.
Acceptable nonbanking activities include: (1) operating an industrial loan
company, mortgage company, finance company, trust company, or credit card
company; (2) performing certain data processing operations; and (3) providing
investment and financial advice. In contrast, prohibited nonbanking
activities include real estate brokerage and syndication, land development,
property management, and the underwriting of life insurance not related to
credit transactions. From time to time, the FRB may add to or delete from
the list of activities permissible for bank holding companies.
Transactions With Affiliates. FCFG and the Bank are considered affiliates
within the meaning of the Federal Reserve Act, and transactions between
affiliates are subject to certain restrictions. Section 23A of the Federal
Reserve Act limits certain covered transactions. These covered transactions
include, subject to specific exceptions, loans by bank subsidiaries to
affiliates, investments by bank subsidiaries in securities issued by an
affiliate or acceptance of such securities as collateral, and the purchase by
a bank subsidiary of an affiliate's assets. Section 23B of the Federal
Reserve Act, among other things, restricts an institution from engaging in
specified transactions with certain affiliates unless the transactions are on
terms substantially the same, or at least as favorable, to the institution as
those prevailing at the time for comparable transactions with non-affiliated
companies.
Tie-In Arrangements. FCFG and the Bank cannot engage in certain tie-in
arrangements in connection with any extension of credit, sale or lease of
property or furnishing of services. For example, with certain exceptions,
neither FCFG nor the Bank may condition an extension of credit on either (1)
a requirement that the customer obtain additional services provided by it or
(2) an agreement by the customer to refrain from obtaining other services
from a competitor. Effective April 21, 1997, the FRB has adopted significant
amendments to its anti-tying rules that: (1) remove FRB-imposed anti-tying
restrictions on bank holding companies and their non-bank subsidiaries; (2)
create exemptions from the statutory restriction on bank tying arrangements
to allow banks greater flexibility to package products
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with their affiliates; and (3) establish a safe harbor from the tying
restrictions for certain foreign transactions. These amendments are designed
to enhance competition in banking and nonbanking products and allow banks and
their affiliates to provide more efficient a lower-cost service to customers.
However, the impact of the amendments on FCFG and its subsidiaries is
unclear at this time.
State Law Restrictions. As a corporation chartered under the laws of the
State of Washington, FCFG is also be subject to certain limitations and
restrictions under applicable Washington corporate laws.
Securities Registration and Reporting. The common stock of FCFG is
registered as a class with the Securities and Exchange Commission ("SEC")
under the Securities Exchange Act of 1934. Thus, FCFG is subject to the
periodic reporting and proxy solicitation requirements and the
insider-trading restrictions of that Act. The periodic reports, proxy
statements, and other information filed by FCFG under that Act can be
inspected and copied at or obtained from the Washington, D.C. office of the
SEC. In addition, the securities issued by FCFG are subject to the
registration requirements of the Securities Act of 1933 and applicable state
securities laws, unless exemptions are available.
Control Transactions
The Change in Bank Control Act of 1978, as amended, requires a person (or
group of persons acting in concert) acquiring "control" of a bank holding
company to provide the FRB with at least 60 days' advance written notice of
the proposed acquisition. Following receipt of this notice, the FRB has 60
days to issue a notice disapproving the proposed acquisition, but the FRB may
extend this time period for up to an additional 30 days. An acquisition may
be completed before the expiration of the disapproval period if the FRB
issues written notice of its intent not to disapprove the transaction.
In addition, any "company" must obtain the FRB's approval under the BHCA
before acquiring 25% (5% if the company is a bank holding company) or more of
the outstanding shares of FCFG, or otherwise obtaining control over FCFG.
The Bank
General
Despite some recent legislative initiatives to reduce regulatory burdens,
banking remains a highly regulated industry. Legislation enacted from time
to time may increase the cost of doing business, limit or expand permissible
activities, or affect the competitive balance between banks and other
financial and non-financial institutions. Proposals to change the laws and
regulations governing the operations and taxation of financial institutions
are frequently made in Congress, in the Washington State Legislature, and
before various bank regulatory agencies. In addition, Congress continues to
consider proposals to restructure the banking system.
Some of the significant areas of bank regulation are discussed below.
Regulation of State Banks
As a Washington state bank, the Bank is subject to primary regulation and
examination by the Washington Director of Financial Institutions ("Director")
and by the FDIC. Applicable federal and state statutes and regulations
governing a bank's operations relate, among other matters, to capital
requirements, required reserves against deposits, investments, loans, legal
lending limits (see below), interest rates, mergers and consolidations,
borrowings, issuance of securities, payment of dividends, establishment of
branches, and dealings with affiliated persons. The FDIC also may prohibit
banks under its supervision from operating their business in what it
considers to be an unsafe and unsound practice. Washington law allows state
banks to invest, up to a specified amount of assets or net worth (as
defined), in the equity securities of any business entity except an insurance
or travel agency. This and certain other powers of state banks have been
limited by federal legislation (for additional information see below, "Recent
Federal Legislation -Interstate Banking and Branching").
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Loans to One Borrower. Washington law limits the amount of funds that a bank
may lend to a single borrower to 20% of capital and surplus. For this
purpose, capital includes (1) the amount of common stock outstanding and
unimpaired, (2) the amount of preferred stock outstanding and unimpaired, and
(3) capital notes or debentures issued pursuant to RCW 30.36. Surplus
includes capital surplus, reflecting the amounts paid in excess of the par or
stated value of capital stock, or amounts contributed to the bank other than
for capital stock, and undivided profits. As of the end of FCFG's fiscal
year for 1996, the Bank's lending limit was approximately $3,500,000.
Regulation of Management
Federal law establishes the circumstances under which officers or directors
of a bank may be removed by the institution's federal supervisory agency,
limits loans by a bank to its executive officers, directors, or principal
shareholders, and prohibits management personnel of a bank from serving in
managerial positions for another financial institution whose assets exceed a
specified amount or which has an office within a specified geographic area.
Control of Financial Institutions
No person may acquire "control" of a bank unless the appropriate federal
agency has been given 60 days' advance written notice and within that time
the agency has not disapproved the acquisition. State banking laws further
require that 30 days prior to the acquisition of control, as defined, the
acquiring party must file with the Director an application containing certain
specified information. Acquisitions of control in violation of the statute
are deemed void, and substantial monetary penalties may be imposed.
Recent Federal Legislation
Interstate Banking and Branching. The Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994 ("Interstate Act") generally will, over the
next few months, permit nationwide interstate banking and branching. Subject
to certain state laws, such as age and contingency laws, the Interstate Act
allows adequately capitalized and adequately managed bank holding companies
to purchase the assets of out-of-state banks, effective as of September 29,
1995. Additionally, beginning June 1, 1997, the Interstate Act permits
interstate bank mergers, subject to these state laws, unless the home state
of either merging bank has "opted-out" of these provisions by enacting
"opt-out" legislation. States may also "opt-in" early to these bank merger
provisions by enacting non-discriminatory "opting-in" legislation to permit
interstate mergers within their own borders before June 1, 1997. States may
still impose certain conditions on interstate bank mergers within their
borders; for example, states may require that the in-state merging bank exist
for up to five years before the interstate merger. Under the Interstate Act,
states may also "opt-in" to de novo branching, allowing out-of-state banks to
establish de novo branches within the state.
In 1996, Washington enacted "opting in" legislation authorizing interstate
mergers pursuant to the Interstate Act. Accordingly, as of June 6, 1996, an
out-of-state bank holding company may now acquire more than 5% of the voting
shares of a Washington-based bank, regardless of reciprocity, provided such
bank or its predecessor has been doing business for at least five years prior
to the acquisition. Further, an out-of-state bank may engage in banking in
Washington if the requirements of Washington's interstate banking statute are
met, and the bank either (1) was lawfully engaged in banking in Washington on
June 6, 1996, (2) resulted from an interstate combination pursuant to
Washington law, (3) resulted from a relocation of a head office of a state
bank or a main office of a national bank pursuant to federal law, or (4)
resulted from the establishment of a savings bank branch in compliance with
applicable Washington law. Additionally, the Director may approve interstate
combinations if the basis for such approval does not discriminate against
out-of-state banks, out-of-state holding companies, or their subsidiaries.
Under its new interstate banking statute, the State of Washington permits
out-of-state banks meeting the above requirements to maintain and operate the
Washington branches of a Washington bank with which the out-of-state bank
engaged in an interstate combination. The out-of state bank may also operate
additional branches in Washington to the same extent as any Washington bank
may under
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applicable federal and state law. Unless prohibited by the laws of the
out-of-state bank's home state, the out-of-state bank may exercise any powers
that are authorized under Washington law for Washington banks. If additional
powers are authorized under the laws of its home state, the out-of-state bank
may seek written authorization from the Director to exercise such powers, if
the exercise of the additional powers (1) will not threaten the safety and
soundness of banks in Washington, and (2) will serve the convenience and
needs of Washington consumers.
Washington laws applicable to Washington state banks regarding community
reinvestment, consumer protection, fair lending, and the establishment of
intrastate branches apply to any Washington branch of an out-of-state bank to
the same extent as such laws apply to a Washington state bank.
Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA").
FDICIA requires federal banking regulators to adopt regulations in a number
of areas to ensure bank safety and soundness. As such, numerous regulations
have been adopted by federal bank regulatory agencies, including the
following: (1) federal bank regulatory authorities have established five
different capital levels for banks and, as a general matter, enable banks
with higher capital levels to engage in a broader range of activities; (2)
the FRB has issued regulations requiring standardized disclosures with
respect to interest paid on deposits; (3) the FDIC has imposed restrictions
on the acceptance of brokered deposits by weaker banks; (4) the FDIC has
implemented risk-based deposit insurance premiums; and (5) the FDIC has
issued regulations requiring state-chartered banks to comply with certain
restrictions with respect to equity investments and activities in which the
banks act as a principal.
FDICIA recapitalized the Bank Insurance Fund ("BIF") and required the FDIC to
maintain the BIF and Savings Association Insurance Fund ("SAIF") at 1.25% of
insured deposits by increasing deposit insurance premiums as necessary to
maintain such ratio. (See "FDIC Insurance" below).
The full effect FDICIA will have on financial institutions is not known at
this time and cannot be predicted with certainty. However, FDICIA and
similar legislation and regulatory requirements have historically increased
the cost of doing business, and it is clear that this legislation places a
premium on the maintenance of a strong capital position.
The Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA"). FIRREA became effective on August 9, 1989. Among other things,
this far-reaching legislation: (1) phased in significant increases in the
FDIC insurance premiums paid by commercial banks; (2) created two deposit
insurance pools within the FDIC, one to insure commercial bank and savings
bank deposits and the other to insure savings association deposits; (3) for
the first time, permitted bank holding companies to acquire healthy savings
associations; (4) permitted commercial banks that meet certain
housing-related asset requirements to secure advances and other federal
services from their local Federal Home Loan Banks; and (5) greatly enhanced
the regulators' enforcement powers by removing procedural barriers and
sharply increasing the civil and criminal penalties for violating statutes
and regulations.
Restrictions on Capital Distributions
Various federal statutory provisions limit the amount of dividends the Bank
is permitted to pay FCFG without regulatory approval. FRB policy further
limits the circumstances under which bank holding companies may declare
dividends. For example, a bank holding company should not continue its
existing rate of cash dividends on its common stock unless its net income is
sufficient to fully fund each dividend, and its prospective rate of earnings
retention appears consistent with its capital needs, asset quality, and
overall financial condition.
If, in the opinion of the applicable federal banking agency, a depository
institution under its jurisdiction is engaged in or is about to engage in an
unsafe or unsound practice (which, depending on the financial condition of
the institution, may include the payment of dividends), the agency may
require, after notice and hearing, that the institution cease and desist from
that practice. In addition, the FRB and the FDIC have issued policy
statements which provide that insured banks and bank holding companies should
generally pay dividends only out of current operating earnings.
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Capital Adequacy Requirements
The FRB, the FDIC, and the Office of the Comptroller of the Currency
(collectively, the "Federal Banking Agencies") have adopted risk-based
capital guidelines for banks and bank holding companies that are designed to
make regulatory capital requirements more sensitive to differences in risk
profiles among banks and bank holding companies and to account for
off-balance sheet items. The guidelines are minimums, and the federal
regulators have noted that banks and bank holding companies contemplating
significant expansion programs should not allow expansion to diminish their
capital ratios and should maintain ratios in excess of the minimums. Failure
to achieve and maintain required capital levels may give rise to supervisory
action through the issuance of a capital directive to ensure the maintenance
of adequate capital levels.
The current guidelines require all federally-regulated banks to maintain a
minimum risk-based total capital ratio equal to 8%, of which at least 4% must
be Tier 1 capital. Tier 1 capital includes common shareholders' equity,
qualifying perpetual preferred stock, and minority interests in equity
accounts of consolidated subsidiaries, but excludes goodwill and most other
intangibles and the allowance for loan and lease losses. Tier 2 capital
includes the excess of any preferred stock not included in Tier 1 capital,
mandatory convertible securities, hybrid capital instruments, subordinated
debt and intermediate term-preferred stock, and general reserves for loan and
lease losses up to 1.25% of risk-weighted assets. The Bank has not received
any notice indicating that it will be subject to higher capital requirements.
Under these guidelines, banks' assets are given risk-weights of 0%, 20%, 50%
or 100%. In addition, certain off-balance sheet items are given credit
conversion factors to convert them to asset equivalent amounts to which an
appropriate risk-weight will apply. These computations result in the total
risk-weighted assets. Most loans are assigned to the 100% risk category,
except for first mortgage loans fully secured by residential property and,
under certain circumstances, residential construction loans (both carry a 50%
rating). Most investment securities are assigned to the 20% category, except
for municipal or state revenue bonds (which have a 50% rating) and direct
obligations of or obligations guaranteed by the United States Treasury or
United States Government Agencies (which have a 0% rating).
The Federal Banking Agencies have also implemented a leverage ratio, which is
equal to Tier 1 capital as a percentage of average total assets less
intangibles, to be used as a supplement to the risk-based guidelines. The
principal objective of the leverage ratio is to place a constraint on the
maximum degree to which a bank may leverage its equity capital base. The
minimum required leverage ratio for top-rated institutions is 3%, but most
institutions are required to maintain an additional cushion of at least 100
to 200 basis points. Any institution operating at or near the 3% level is
expected to have well-diversified risk, including no undue interest rate risk
exposure, excellent asset quality, high liquidity and good earnings, and in
general, to be a strong banking organization without any supervisory,
financial or operational weaknesses or deficiencies. Any institutions
experiencing or anticipating significant growth would be expected to maintain
capital ratios, including tangible capital positions, well above the minimum
levels.
Regulations adopted by the Federal Banking Agencies as required by FDICIA
impose even more stringent capital requirements. The regulators require the
FDIC and other Federal Banking Agencies to take certain "prompt corrective
action" when a bank fails to meet certain capital requirements. The
regulations establish and define five capital levels: (1) "well-capitalized,"
(2) "adequately capitalized," (3) "undercapitalized," (4) "significantly
undercapitalized" and (5) "critically undercapitalized." To qualify as
"well-capitalized," an institution must maintain, among other things, at
least 10% total risk-based capital and a leverage ratio of not less than 5%.
Increasingly severe restrictions are imposed on the payment of dividends and
management fees, asset growth and other aspects of the operations of
institutions that fall below the category of "adequately capitalized" (which
requires at least 8% risk-based capital and a leverage ratio of at least 4%).
Undercapitalized institutions are required to develop and implement capital
plans acceptable to the appropriate federal regulatory agency. Such plans
must require that any company that controls the undercapitalized institution
must provide certain guarantees that the institution will comply with the
plan until it is adequately capitalized. As of December 31, 1996, the Bank
was not subject to any regulatory order, agreement, or directive to meet and
maintain a specific capital level for any capital measure.
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In August of 1995, the Federal Banking Agencies adopted a final rule
implementing the portion of Section 305 of FDICIA that requires the banking
agencies to revise their risk-based capital standards to ensure that those
standards take adequate account of interest rate risk. Effective September
1, 1995, when evaluating the capital adequacy of a bank, the Federal Banking
Agencies' examiners will consider exposure to declines in the economic value
of the bank's capital due to changes in interest rates. A bank may be
required to hold additional capital for interest rate risk if it has a
significant exposure or a weak interest rate risk management process.
Concurrent with the publication of this final rule, the Federal Banking
Agencies proposed for comment a joint policy statement describing the process
the Federal Banking Agencies will use to measure and assess a bank's interest
rate risk. This joint policy statement was superseded by an updated Joint
Policy Statement in June of 1996. Any impact the joint final rule and the
Joint Policy Statement may have on FCFG or the Bank cannot be predicted at
this time.
In addition, the Agencies published a joint final rule on September 6, 1996,
amending their respective risk-based capital standards to incorporate a
measure for market risk to cover all positions located in an institution's
trading account and foreign exchange and commodity positions wherever
located. This final rule, effective January 1, 1997, implements an amendment
to the Basle Capital Accord that sets forth a supervisory framework for
measuring market risk. The final rule effectively requires banks and bank
holding companies with significant exposure to market risk to measure that
risk using its own internal value-at-risk model, subject to the parameters of
the final rule, and to hold a sufficient amount of capital to support the
institution's risk exposure.
Institutions subject to this final rule must be in compliance with it by
January 1, 1998. This final rule applies to any bank or bank holding
company, regardless of size, whose trading activity equals 10% or more of its
total assets, or whose trading activity equals $1 billion or more. An
institution's trading activity is defined as the sum of its trading assets
and trading liabilities as reported in its most recent call report for a
bank, or its most recent Y-9C Report for a bank holding company. Total
assets means quarter-end total assets. The Agencies may require an
institution not otherwise subject to the final rule to comply with it for
safety and soundness reasons and also may exempt an institution otherwise
subject to the final rule from compliance under certain circumstances.
FDIC Insurance
Generally, customer deposit accounts in banks are insured by the FDIC for up
to a maximum amount of $100,000. The FDIC has adopted a risk-related
insurance assessment system under which depository institutions contribute
funds to the BIF and the SAIF based on their risk classification. The FDIC
assigns institutions a risk classification based on three capital groups and
three supervisory subgroups. The capital groups are "well capitalized,"
"adequately capitalized," and "undercapitalized." The three supervisory
subgroups are Group "A" (for financially sound institutions with only a few
minor weaknesses), Group "B" (for those institutions with weaknesses which,
if uncorrected, could cause substantial deterioration of the institution and
increase risk to the deposit insurance fund), and Group "C" (for those
institutions with a substantial probability of loss to the fund absent
effective corrective action).
On September 30, 1996, the Deposit Insurance Funds Act of 1996 ("Funds Act")
was enacted. The Funds Act provides, among other things, for the
recapitalization of the SAIF through a special assessment on all depository
institutions that hold SAIF insured deposits. The one-time assessment is
designed to place the SAIF at its 1.25 reserve ratio goal.
The Funds Act, for the three year period beginning in 1997, subjects
BIF-insured deposits to a Financing Corporation ("FICO") premium assessment
on domestic deposits at one-fifth the premium rate (approximately 1.3 basis
points) imposed on SAIF insured deposits (approximately 6.5 basis points).
In addition, service debt funding on FICO bonds for the first half of 1997 is
expected to result in BIF-insured institutions paying .64 cents for each $100
of assessed deposits, and SAIF insured institutions paying 3.2 cents on each
$100 of deposits. Beginning in the year 2000, BIF insured institutions will
be required to pay the FICO obligations on a pro-rata basis with all thrift
institutions; annual assessments are expected to equal approximately 2.4
basis points until 2017, to be phased out completely by 2019.
9
<PAGE>
For at least the first half of 1997, BIF premiums will be maintained at their
current level. Accordingly, institutions in the lowest risk category will
continue to pay no premiums, and other institutions will be assessed based on
a range of rates, with those in the highest risk category paying 27 cents for
every $100 of BIF insured deposits. Rates in the SAIF assessment schedule,
previously ranging from 4 to 31 basis points, have recently been adjusted by
4 basis points to a range of 0 to 27 basis points (as of October 1, 1996).
Banking regulators are empowered under the Funds Act to prohibit insured
institutions and their holding companies from facilitating or encouraging the
shifting of deposits from the SAIF to the BIF in order to avoid higher
assessment rates. Accordingly, the FDIC recently proposed a rule that would,
if adopted as proposed, impose entrance and exit fees on depository
institutions attempting to shift deposits from the SAIF to the BIF as
contemplated by the Funds Act. The Funds Act also provides for the merger of
the BIF and SAIF on January 1, 1999, only if no thrift institutions exist on
that date. It is expected that Congress will address comprehensive
legislation on the merger of the funds and elimination of the thrift charter
during the 1997 session.
ITEM 2 - PROPERTIES
First Community Bank owns the property and building on which the East
Olympia, Elma, Hoquiam, Lacey, Yelm, Fircrest, Centralia and downtown Olympia
branches are situated, as well as the property and building to be occupied by
the Aberdeen branch, which is scheduled to open later in 1997. The Tumwater
branch is operated out of a building owned by FCB which is situated on leased
property. The branch on 74th Street in South Tacoma is located in leased
space in a two story office building.
The Lacey branch is a two story building with a basement and a drive-up,
which has approximately 17,500 square feet and is fully utilized as a branch
bank, administrative offices, operations center, loan processing center and
data processing facility. The Olympia East branch is a 3,000 square foot,
one story structure with a drive-up facility. The Tumwater, Yelm, Centralia,
Aberdeen and Hoquiam branches are single story structures with drive-up
facilities. The Elma branch is a two story structure with a drive-up
facility. The Downtown Olympia branch is a two story structure with a
drive-up. The Fircrest facility is an office condominium, of which the Bank
occupies approximately one-half.
ITEM 3 - LEGAL PROCEEDINGS
From time to time in the ordinary course of business, FCFG or its
subsidiaries may be involved in litigation. At the present time neither FCFG
nor any of its subsidiaries are involved in any material litigation
proceeding.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the year ended December 31, 1996, no matters
were submitted to the security holders through the solicitation of proxies or
otherwise.
10
<PAGE>
PART II
ITEM 5 - MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information
No broker makes a market in FCFG's common stock, and trading has not been
extensive. Trades that have occurred cannot be characterized as amounting to
an active market. The stock is traded by individuals on a personal basis and
is not listed on any exchange or traded on the over-the-counter market. Due
to the limited information available, the following price information may not
accurately reflect the actual market value of FCFG's shares. The following
data includes trades between individual investors and new issues of stock.
It does not include the exercise of stock options or shares issued in the
acquisition of Northwest Community Bank.
# of Shares
Period Traded Price Range
1995 25,938 $17.60 - $21.00
1996 61,036 $20.00 - $22.00
In connection with the acquisition of Prairie Security Bank, the Company's
stock was valued by an independent appraiser, solely for the purpose of that
transaction, at $24.55 per share.
As discussed in Note 19 of the consolidated financial statements, the Company
repurchased 122,570 shares from certain shareholders at a price of $20.50 per
share.
At December 31, 1996, options for 371,104 shares of FCFG common stock were
outstanding. See Note 14 of the audited financial statements for additional
information.
Number of Equity Holders
As of December 31, 1996, there were 1,045 holders of record of FCFG's common
stock.
Dividends
There were no cash dividends declared in 1996 or 1995. In 1992, the Board of
Directors adopted a policy to declare a stock dividend each year over the
next five (5) years while FCFG is in a pattern of growth. The amount of the
dividend to be paid will be determined by the Board of Directors and will
depend on the growth experienced by FCFG and the profits generated. Stock
dividends of 5% and 5% were issued on February 28, 1995 and March 20, 1996,
respectively.
Washington law limits the ability of the Bank to pay dividends to the
Company. Under these restrictions, a bank may not declare or pay any dividend
in an amount greater than its retained earnings without approval of the
Division of Banks. All of the retained earnings of FCB are available for the
payment of dividends to the Company under these restrictions, subject to the
federal capital regulations discussed above.
ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Incorporated by reference to the Management's Discussion and Analysis of
Financial Condition and Results of Operations as filed March 31, 1997 in the
Definitive Proxy Statement ("Proxy Statement").
11
<PAGE>
ITEM 7 - FINANCIAL STATEMENTS
The Audited Consolidated Financial Statements of First Community Financial
Group, Inc. as of and for the years ended December 31, 1996 and 1995 are
hereby incorporated by reference to the Definitive Proxy Statement filed
March 31, 1997.
ITEM 8 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Within the 24 months prior to December 31, 1996, FCFG has neither changed
independent accountants, at either FCFG's election or by reason of the
accountant's resignation, nor had any disagreements in regards to matters of
accounting principles, practices or financial statement disclosure.
PART III
ITEM 9 - DIRECTORS AND EXECUTIVE OFFICERS; COMPLIANCE WITH SECTION 16(a) OF
THE EXCHANGE ACT
The following table lists the name and certain information as of December 31,
1996 regarding the directors of FCFG or predecessor companies, and executive
officers of FCFG and the Bank.
<TABLE>
Year
Became FCFG
FCFG FCFG Corporate Term
Name and Age Director Principal Occupation Affiliation Expires
<S> <C> <C> <C> <C>
Arneson, James F. (36) N/A Executive Vice President/Chief FCFG -Treasurer N/A
Financial Officer, First FCB - Treasurer
Community Financial Group
DeTray, E. Paul (63) 1979 President, DeTray's Quality FCFG - Chairman 1999
Homes FCB - Director
Durney, John D. (48) 1993 V.P./Co-Owner, Durney FCFG - Director 1999
Agency, Inc. FCB - Director
Huber, John A. (52) N/A Executive Vice FCB - Director N/A
President/President Grays
Harbor Region, First
Community Bank
Martin, Patrick (58) 1980 President, Patrick's Decorating FCFG - Director 1997
Center (1) FCB - Director
Murphy, Michael (54) 1993 WA Deputy State Auditor FCFG - Director 1999
FCB - Director
Panowicz, A. Richard (52) 1995 President, Tab Northwest FCFG - Director 1998
FCB - Director
Parsons, Ken F. (51) 1979 President and CEO, First FCFG - Vice 1997
Community Financial Group Chairman
FCB - Chairman
Wilcox, Kenneth (67) 1979 Retired Pharmacist FCFG - Director 1998
FCB - Director
</TABLE>
(1) Mr. Martin serves as a director of Carpet Co-op of America, d/b/a
Carpet One, a public company which has a class of securities
registered under Section 12 or subject to the requirements of Section
15(d) of the Securities Exchange Act of 1934.
12
<PAGE>
Compliance with Section 16(a) of the Securities Exchange Act
FCFG has adopted procedures to assist its directors and executive
officers with Section 16(a) of the Securities Exchange Act, which
includes assisting the officer or director in preparing forms for
filing with the Securities Exchange Commission. Based on the review
of such forms, FCFG believes that all of its executive officers and
directors complied with all filing requirements applicable to them.
ITEM 10 - EXECUTIVE COMPENSATION
Incorporated by reference to Executive Compensation, as filed in the
Proxy Statement on March 31, 1997.
ITEM 11 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Incorporated by reference to Ownership of FCFG Common Stock, as filed
in the Definitive Proxy Statement on March 31, 1997.
ITEM 12 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference to Certain Relationships and Related
Transactions, as filed in the Definitive Proxy Statement on March 31,
1997.
13
<PAGE>
ITEM 13 - INDEX TO EXHIBITS
The following exhibits are filed as part of this report:
(3) a. The Registrant's Articles of Incorporation are hereby incorporated by
reference from Exhibit 3 of Registrant's Registration Statement on
Form S-4, as filed and declared effective November 20, 1992 under
Commission File Number 33-52556.
(3) b. The Registrant's Articles of Amendment are hereby incorporated by
reference from Exhibit 3 of Registrant's Registration Statement on
Form S-4, as filed and declared effective November 20, 1992 under
Commission File Number 33-52556.
(3) c. The Registrant's Amendments to the Articles of Incorporation are
referenced from Exhibit 3c of Registrant's Form 10-KSB for the year
ending December 31, 1993 as filed March 29, 1994 under Commission File
Number 33-52556.
(3) d. The Registrant's Bylaws are hereby incorporated by reference from
Exhibit 3 of Registrant's Registration Statement on Form S-4, as
filed and declared effective November 20, 1992 under Commission File
Number 33-52556.
(10) a. The employment contract for Ken F. Parsons is hereby incorporated by
reference from Exhibit 10 of Registrant's Form 10-QSB, as filed for
quarter ended September 1996 under Commission File Number 0-24024.
(10) b. The employment contract for John A. Huber is hereby incorporated by
reference from Exhibit 10 of Registrant's Registration Statement on
Form S-4, as filed and declared effective November 20, 1992 under
Commission File Number 33-52556.
(10) c. Non-compete agreements of the Directors of the Registrant and Citizens
First Bank are hereby incorporated by reference from Exhibit 10 of
Registrant's Registration Statement on Form S-4, as filed and declared
effective November 20, 1992 under Commission File Number 33-52556.
(10) d. The employment contract for John R. Johnson, Sr. is hereby
incorporated by reference from Exhibit 10 of Registrant's Form 10-KSB
for the year ending December 31, 1992, as filed March 29, 1993 under
Commission File Number 33-52556.
(10) e. The Registrant's 1992 Stock Option Plan for Non-employee Directors is
hereby incorporated by reference from Exhibit 10 of Registrant's Form
10-KSB for the year ending December 31, 1992, as filed March 29, 1993
under Commission File Number 33-52556.
(10) f. The Registrant's Second Amended Non-employee Directors Stock Option
Plan is hereby incorporated by reference from Exhibit 10 of
Registrant's Form 10-KSB for the year ending December 31, 1992, as
filed March 29, 1993 under Commission File Number 33-52556.
(10) g. The Registrant's Employee Stock Option and Restricted Stock Award Plan
is hereby incorporated by reference from Exhibit 10 of Registrant's
Form 10-KSB for the year ending December 31, 1992, as filed March 29,
1993 under Commission File Number 33-52556.
(10) h. The Registrant's Executive Supplemental Income Plan is hereby
incorporated by reference from Exhibit 10 of Registrant's Form 10-KSB
for the year ending December 31, 1992, as filed March 29, 1993 under
Commission File Number 33-52556.
14
<PAGE>
(10)i. The Registrant's 1994 Stock Option Plan for Nonemployee Directors is
hereby incorporated by reference from Exhibit 10 of the Registrant's
Form 10-KSB for the year ending December 31, 1994, as filed March 30,
1995 under Commission File Number 0-24024.
(10)j. Amended and Restated Plan and Agreement of Reorganization and Merger
between Registrant, First Community Bank, and Prairie Security Bank,
effective as of September 11, 1996 as amended on October 18, 1996, is
hereby incorporated by reference from Appendix A to Registration
Statement on form S-4, filed on November 1, 1996, under Commission
file number 333-15321.
(10)k. The employment contract for Michael D. Edwards is hereby incorporated
by reference from Exhibit 10.4 of the Registration Statement on Form
S-4, filed on November 1, 1996, under Commission Number 333-15321.
(10)l. Stock Purchase and Sale Agreement, by and among Registrant and Certain
Selling Shareholders, effective October 31, 1996, is hereby
incorporated by reference from Exhibit 10.5 to Amendment No. 1 to
Register Statement on form S-4, filed on November 26, 1996 under
Commission Number 333-15321.
(21) Subsidiaries of Registrant
15
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of The Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, on the 31st day
of March, 1997.
FIRST COMMUNITY FINANCIAL GROUP, INC.
By:/s/ Ken F. Parsons
-------------------------
Ken F. Parsons
President
Chief Executive Officer
By:/s/ James F. Arneson
--------------------------
James F. Arneson
Executive Vice President
Chief Financial Officer
Principal Accounting Officer
/s/ Ken F. Parsons
- -------------------------- President March 31, 1997
Ken F. Parsons
/s/ E. Paul DeTray
- -------------------------- Chairman March 31, 1997
E. Paul DeTray
/s/ John D. Durney
- -------------------------- Director March 31, 1997
John D. Durney
/s/ Patrick L. Martin
- -------------------------- Director March 31, 1997
Patrick L. Martin
/s/ Kenneth M. Wilcox
- -------------------------- Director March 31, 1997
Kenneth M. Wilcox
/s/ Michael N. Murphy
- -------------------------- Director March 31, 1997
Michael N. Murphy
16
<PAGE>
Exhibit 21
FIRST COMMUNITY FINANCIAL GROUP, INC.
Subsidiaries Owned at December 31, 1996
Name of Subsidiary Trade Name State of Incorporation
First Community Bank of Washington Same Washington
Information Management Systems, Inc. Same Washington
FCB Financial Services, Inc. Same Washington
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET OF FIRST COMMUNITY FINANCIAL GROUP INC AS OF DECEMBER
31, 1996 AND THE RELATED STATEMENT OF INCOME STOCKHOLDERS EQUITY AND CASH FLOWS
FOR THE YEAR THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 8,467
<INT-BEARING-DEPOSITS> 10,141
<FED-FUNDS-SOLD> 4,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 7,513
<INVESTMENTS-CARRYING> 3,182
<INVESTMENTS-MARKET> 3,249
<LOANS> 130,632
<ALLOWANCE> 1,420
<TOTAL-ASSETS> 176,501
<DEPOSITS> 153,434
<SHORT-TERM> 0
<LIABILITIES-OTHER> 854
<LONG-TERM> 1,249
0
0
<COMMON> 4,246
<OTHER-SE> 16,673
<TOTAL-LIABILITIES-AND-EQUITY> 176,501
<INTEREST-LOAN> 14,017
<INTEREST-INVEST> 717
<INTEREST-OTHER> 544
<INTEREST-TOTAL> 15,278
<INTEREST-DEPOSIT> 5,546
<INTEREST-EXPENSE> 5,656
<INTEREST-INCOME-NET> 9,622
<LOAN-LOSSES> 261
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 8,606
<INCOME-PRETAX> 2,579
<INCOME-PRE-EXTRAORDINARY> 1,861
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,861
<EPS-PRIMARY> 1.03
<EPS-DILUTED> 1.01
<YIELD-ACTUAL> 9.93
<LOANS-NON> 1,898
<LOANS-PAST> 1,238
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 3,136
<ALLOWANCE-OPEN> 1,376
<CHARGE-OFFS> 227
<RECOVERIES> 10
<ALLOWANCE-CLOSE> 1,420
<ALLOWANCE-DOMESTIC> 1,420
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
