<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No. )
Filed by the Registrant /x/
Filed by a party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
/x/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Section 240.14a-11(c) or Section
240.14a-12
First Community Financial Group, Inc.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/x/ No fee required
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(1)
and 0-11
(1) Title of each class of securities to which transaction applies:
------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
------------------------------------------------------------------------
(5) Total fee paid:
------------------------------------------------------------------------
/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
------------------------------------------------------------------------
(3) Filing Party:
------------------------------------------------------------------------
(4) Date Filed:
------------------------------------------------------------------------
<PAGE>
FIRST COMMUNITY FINANCIAL GROUP, INC.
721 College Street, S.E.
P.O. Box 3800 (98509-3800)
Lacey, WA 98503
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
NOTICE IS HEREBY GIVEN that pursuant to the call of its directors, the
regular Annual Meeting of Shareholders of First Community Financial Group,
Inc. will be held at the Holiday Inn Select, 2300 Evergreen Park Drive,
Olympia, Washington on Wednesday, May 7, 1997, at 6:00 p.m., for the purpose
of considering and voting upon the following matters:
1. ELECTION OF DIRECTORS. To elect three Directors for a term of three
years expiring in the year 2000, or until their successors have been
elected and qualified.
2. WHATEVER OTHER BUSINESS as may properly be brought before the meeting or
any adjournment of the meeting.
Only those shareholders of record at the close of business on March 31,
1997, will be entitled to notice of, and to vote at the meeting.
BY ORDER OF THE BOARD OF DIRECTORS
Lacey, Washington Lori L. Fobes
March 31, 1997 Secretary
IMPORTANT: An affirmative vote of the holders of a majority of the
outstanding shares is required to approve Item 1. The prompt return of
proxies will save FCFG the expense of further requests for proxies. You are
urged to SIGN AND RETURN THE ENCLOSED PROXY PROMPTLY. If you do attend the
meeting, you may then withdraw your Proxy. Any person giving a Proxy may
revoke it prior to its exercise.
<PAGE>
FIRST COMMUNITY FINANCIAL GROUP, INC.
721 College Street, S.E.
P.O. Box 3800 (98509-3800)
Lacey, WA 98503
PROXY STATEMENT
This Proxy Statement and the accompanying Proxy are being first sent to
shareholders on or about March 31, 1997, for use in connection with the
Annual Meeting of Shareholders of First Community Financial Group, Inc.
("FCFG" or "Company") to be held on Wednesday, May 7, 1997. Only those
shareholders of record at the close of business on March 31, 1997, will be
entitled to vote. The number of shares of FCFG's common stock, $2.50 value
("Common Stock"), outstanding and entitled to vote at the Annual Meeting is
1,884,299.
The enclosed Proxy is solicited by and on behalf of the Board of
Directors of FCFG and the cost of solicitation will be borne by FCFG.
Solicitation may be made by directors and officers of FCFG and its
subsidiary, First Community Bank ("FCB" or "Bank"). Solicitation may be made
by use of the mails, by telephone, facsimile and personal interview. FCFG
does not expect to pay any compensation for the solicitation of proxies.
If the enclosed Proxy is duly executed and received in time for the
meeting, it is the intention of the persons named in the Proxy to vote the
shares represented by the Proxy FOR the three nominees listed in this Proxy
Statement, unless otherwise directed. Any proxy given by a shareholder may be
revoked before it's exercise by written notice to FCFG, by a subsequently
dated proxy, or in open meeting prior to the taking of the shareholder vote.
The shares represented by properly executed, unrevoked proxies will be voted
in accordance with the specifications in the Proxy. Shareholders have one
vote for each share of Common Stock held, including the election of
directors. Shareholders are not entitled to cumulate their votes in the
election of directors.
ELECTION OF DIRECTORS
General
FCFG's Bylaws provide that the number of directors must fall within a
range of 5 and 15, the exact number to be determined by resolution of the
Board of Directors. The Bylaws also provide that the Board of Directors may
increase the number of directors by not more than two (2) between
shareholders' meetings, and may fill the vacancies created by doing so,
provided that the number of directors shall at no time exceed fifteen (15).
Directors are elected for a term of three years and until their
successors have been elected and qualified. FCFG's Articles of Incorporation
require that the terms of the directors be staggered such that approximately
one-third of the directors are elected each year. In accordance with this
requirement, the Board of Directors has nominated Messrs. Parsons, Martin and
Edwards for election as directors for three-year terms to expire in the year
2000. The Board of Directors has no present knowledge that any of the
nominees will refuse or be unable to serve. If Messrs. Parsons, Martin, and
Edwards, or any of them, should refuse or be unable to serve, your proxy will
be voted for those persons subsequently designated by the Board of Directors
to replace any or all nominees.
Other nominations, if any, may be made only in accordance with the prior
notice provisions contained in the Articles of Incorporation.
<PAGE>
Information with Respect to Nominees and Directors whose Terms Continue
The following table sets forth certain information with respect to the
nominees for director and for directors whose terms continue. The table
includes their ages, their principal occupations during the past five years,
and the year in which they were first elected a director of FCFG or
predecessor corporations. The table also indicates the number of shares of
Common Stock beneficially owned by each individual on January 1, 1997 and the
percentage that the individual's holdings represented of Common Stock
outstanding on that date. However, where beneficial ownership was less than
one percent of all outstanding shares, the percentage is not reflected in the
table.
NOMINEES FOR DIRECTOR FOR THREE YEAR TERM EXPIRING IN 2000
(CLASS I DIRECTORS)
<TABLE>
<CAPTION>
SHARES & PERCENTAGE OF
COMMON STOCK
PRINCIPAL OCCUPATION BENEFICIALLY OWNED
NAME, AGE AND OF DIRECTOR DURING AS OF
TENURE AS DIRECTOR LAST FIVE YEARS JANUARY 1,1997
- ---------------------------------- ---------------------------------- ----------------------
<S> <C> <C>
Patrick L. Martin, 58 (1)......... President, Patrick's 38,206(2)
Director since 1980 Decorating Center 2.20%
Ken F. Parsons, 51................ President & CEO; FCFG 123,226(3)
Director since 1979 Chairman, director & CEO, Bank 6.76%
Chairman, director & CEO, IMS
Michael D. Edwards, 52............ President & director, Bank
Former President & CEO, Prairie Security
Bank -0- (4)
</TABLE>
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE "FOR" ALL
OF THE DIRECTOR NOMINEES
- ------------------------
(1) Mr. Martin also 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.
(2) Includes 13,752 shares held jointly with spouse; 2,685 shares held in an
IRA account for the Benefit of Mr. Martin; 310 shares held in IRA account
for the benefit of Mr. Martin's wife; 661 shares held by Mr. Martin's
mother, over which Mr. Martin has voting and dispositive power; 10,617
shares which could be acquired within 60 days by the exercise of stock
options.
(3) Includes 50,424 shares held jointly with spouse; 13,740 and 1,429 held in
IRA accounts for the benefit of Mr. Parsons; 633 shares representing Mr.
Parsons ownership in an investment partnership; 868 shares held in an IRA
for the benefit of Mrs. Parsons; 5,301 shares held in the KSOP for the
benefit of Mr. Parsons; 14,000 unallocated shares held by the KSOP,
considered beneficially owned by Mr. Parsons as trustee for the KSOP; and
36,831 shares which could be acquired within 60 days by the exercise of
stock options.
(4) Mr. Edwards owned no shares of FCFG Common Stock as of January 1, 1997. At
that date, Mr. Edwards owned 2,117 shares of PSB Common Stock. Upon the
merger of PSB with and into the Bank as of 7:01 p.m. on February 6, 1997,
Mr. Edwards' PSB shares were converted into a right to receive 4,110 shares
of FCFG Common Stock.
2
<PAGE>
DIRECTORS WITH TERM EXPIRING IN 1998
(CLASS II DIRECTORS)
<TABLE>
<CAPTION>
SHARES & PERCENTAGE OF
COMMON STOCK
PRINCIPAL OCCUPATION BENEFICIALLY OWNED
NAME, AGE AND, OF DIRECTOR DURING AS OF
TENURE AS DIRECTOR LAST FIVE YEARS JANUARY 1,1997
- -------------------------------------- -------------------------------------- ----------------------
<S> <C> <C>
A. Richard Panowicz, 52............... President, Tab Northwest 55,517(5)
Director since 1995 3.17%
Kenneth M. Wilcox, 67................. Retired Pharmacist 46,975(6)
Director since 1979 2.69%
</TABLE>
DIRECTORS WITH TERM EXPIRING 1999
(CLASS III DIRECTORS)
<TABLE>
<CAPTION>
SHARES & PERCENTAGE OF
COMMON STOCK
PRINCIPAL OCCUPATION BENEFICIALLY OWNED
NAME, AGE AND OF DIRECTOR DURING AS OF
TENURE AS DIRECTOR LAST FIVE YEARS JANUARY 1,1997
- ---------------------------------- ---------------------------------- ----------------------
<S> <C> <C>
E. Paul DeTray, 63................ President, DeTray's Quality Homes 99,426(7)
Director since 1979 5.63%
John D. Durney, 48................ Vice President/Co-Owner, 7,491(8)
Director since 1987 Durney Agency, Inc.
Michael N. Murphy, 54 Washington Deputy State Auditor 12,955(9)
Director since 1978
</TABLE>
- ------------------------
(5) Includes 16,045 shares held jointly with spouse; 11,560 shares held in an
IRA account for the benefit of Mr. Panowicz; 14,000 unallocated shares held
by the KSOP of which Mr. Panowicz is a trustee; and 10,617 shares which
could be acquired within 60 days by the exercise of stock options.
(6) Includes 33,675 shares held jointly with spouse; 2,683 shares held in an
IRA account for the benefit of Mr. Wilcox; and 10,617 shares which could
be acquired within 60 days by the exercise of stock options.
(7) Includes 45,335 shares held jointly with spouse; 15,789 shares held by
DeTray's Quality Homes; 7,150 held by a the DeTray Family Partnership;
14,000 unallocated shares held by the KSOP, considered beneficially owned
by Mr. DeTray as Trustee for the KSOP; and 10,617 shares which could be
acquired within 60 days by the exercise of stock options.
(8) Includes 1,631 shares held in IRA accounts for the benefit of Mr. Durney;
1,312 shares owned by spouse; 110 shares held in an IRA for the benefit of
Mrs. Durney; 220 shares owned by minor children; and 2,116 shares which
could be acquired within 60 days by the exercise of stock options.
(9) Includes 2,116 shares which could be acquired within 60 days by the
exercise of stock options.
3
<PAGE>
INFORMATION REGARDING THE BOARD OF DIRECTORS AND ITS COMMITTEES
Board of Directors
The Board of Directors of FCFG generally meets on a monthly basis. There
were nine (9) meetings of the Board of Directors of FCFG during 1996. All
directors attended more than 75% of such meetings and of all committee
meetings of which they were members.
Committees
The Board of Directors of FCFG and the Bank have established certain
standing committees, including an Executive Committee and Audit Committee.
There is presently no standing Nominating Committee.
Executive Committee. The Executive Committee is authorized, to the
extent permitted by law, to act on behalf of the Board of Directors on all
matters that may arise between regular meetings of the Board upon which the
Board of Directors would be authorized to act. Current members of the
committee are Messrs. DeTray (Chairman), Martin, Panowicz, and Parsons. There
were six (6) meetings of the Executive Committee during 1996.
Audit Committee. The Audit Committee's function is to meet with
management, the internal auditors and the independent auditors to review and
evaluate the Company's audited financial statements, internal accounting
controls, regulatory examinations and compliance with laws, regulations and
corporate policy. Current members of the committee are Messrs. Panowicz
(Chairman), Durney, Murphy, and Wilcox. There were five (5) meetings of the
Audit Committee during 1996.
Finance/Budget/Personnel Committee. This Committee reviews and sets
direction of all business planning, budget approval, personnel and
compensation issues. Current members of the committee are Messrs. Parsons
(Chairman), DeTray, Martin, and Panowicz. Mr. Parsons did not participate in
the Board action in regard to his compensation. There were three (3) meetings
of this committee during 1996.
Director Compensation
Director and Committee Fees. FCFG has an established program for director
compensation in which each director of FCFG receives an annual retainer fee
of $2,400, a board meeting attendance fee of $350 per board meeting and a
committee meeting fee of $175 per meeting. Directors of the Bank also receive
an annual retainer of $2,400, a board meeting attendance fee of $350 per
meeting and a committee meeting fee of $175 per meeting.
Deferred Compensation Agreements. In 1992, the Company entered into
deferred compensation agreements with four (4) directors of FCB. The
agreements allow the director, at their option, to defer regular monthly
Board fees for five years or until retirement or termination of the agreement.
Performance Based Fees. A performance based fee schedule plan was
implemented in 1992 under which, in addition to the base fees, directors
receive fee adjustments based on FCFG's annual performance as measured by
return on assets. For the fiscal year 1996, there were performance based fees
for Directors of $1,000 per director.
Director Stock Option Plan. On April 19, 1994 the shareholders approved
the 1994 Stock Option Plan for Non-Employee Directors ("1994 Plan") which
authorized the grant of options to purchase shares of Common Stock to
non-employee directors. The 1994 Plan supplements the previously approved
1989 and 1992 Stock Option Plans for Non-Employee Directors ("1989/1992
Plans"). The exercise price of the options granted under the 1994 Plan must
be not less than the greater of the book value or market value at the time of
grant, and options have a term of not more than ten years from the date of
grant. At December 31, 1996, options to purchase 74,223 shares remained
granted and unexercised under the 1994 Plan and 1989/1992 Plans.
4
<PAGE>
In connection with the acquisition of Prairie Security Bank ("PSB") and
pursuant to the terms of the Amended and Restated Plan and Agreement of
Reorganization and Merger ("Agreement") all options granted under the
existing PSB Non-Statutory Director Stock Option Plan were recognized by FCB
as options to receive FCFG Common Stock to the two PSB directors who have
agreed to serve on the Combined Bank's board of directors.
EXECUTIVE COMPENSATION
Summary
The following table sets forth a summary of certain information
concerning the compensation awarded to or paid by FCFG and/or the Bank for
services rendered in all capacities during the last three fiscal years to the
Chief Executive Officer and the most highly compensated executive officers of
FCFG whose total compensation during the last fiscal year exceeded $100,000,
and senior executives of significant subsidiaries.
<TABLE>
<CAPTION>
Summary Compensation Table
Long Term Compensation
-------------------------------------
Annual Compensation Awards Payouts
-------------------------------------- -------------------------------------
Other Restricted Securities
Annual Stock Underlying LTIP All Other
Name and Salary Bonus Compensation Awards Options/ Payouts Compensation
Principal Position Year ($)(1) ($) ($) ($) SARs (#)(2) ($) ($)(3)
- -------------------- ---- ------ ----- ------------ --------- ----------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Ken F. Parsons
President, Director... 1996 $130,203 $33,789 $0 0 100,000 0 $9,900
& CEO--FCFG
Chairman, Director..... 1995 $108,933 $26,000 $0 0 0 0 $8,844
& CEO--Bank
Chairman, Director..... 1994 $99,865 $23,816 $0 0 28,000 0 $9,756
& CEO--IMS
</TABLE>
- ------------------------
(1) Includes salary and any fees paid as a director for participation in Board
and committee meetings. Amount does not include deferred salary and
director fees totaling $11,750 for Mr. Parsons for the year 1996.
(2) Consists of awards granted pursuant to FCFG's Employee Stock Option and
Restricted Stock Award Plan.
(3) Includes amounts paid by FCFG pursuant to the Company's Employee Stock
Ownership Plan with 401(k) Provisions.
5
<PAGE>
Stock Options
The following table sets forth certain information concerning exercises
of stock options pursuant to the FCFG's stock option plans by the named
executive officers during the year ended December 31, 1996 and stock options
held at year end.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND YEAR END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF VALUE OF
UNEXERCISED UNEXERCISED OPTIONS AT
SHARES SHARES YEAR END (1)
ACQUIRED ON VALUE -------------------------- --------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------------------- ------------- --------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Ken F. Parsons............................. 1,499 $ 20,680 36,831 123,512 $ 401,778 $ 398,496
</TABLE>
- ------------------------
(1) On December 31, 1996, the estimated market price of the Common Stock was
$22.00. For purposes of the foregoing table, stock options with an exercise
price less than that amount are considered to be "in-the-money" and are
considered to have a value equal to the difference between this amount and
the exercise price of the stock option multiplied by the number of shares
covered by the stock option.
Employment Agreements
Ken F. Parsons. On September 1, 1996, FCFG entered into an employment
agreement with Mr. Parsons, President, Chief Executive Officer and Director
of FCFG, and Chief Executive Officer and Director of the Bank. The agreement
has an eight-year term, subject to renewal. FCFG may terminate the agreement
at any time for cause without incurring any post-termination obligation to
Mr. Parsons, or without cause with severance benefits of between thirty-six
months' and seventy-two months' salary continuation. If Mr. Parsons
terminates his employment for any reason within twelve months of a change in
majority control of FCFG, then the agreement provides the same severance
benefits. Mr. Parsons is generally prohibited from competing with FCFG in its
market area for at least twelve months following termination for any reason.
The non-compete period is increased to thirty-six months following
termination by FCFG without cause or by Mr. Parsons with good reason. The
agreement provides that upon retirement, Mr. Parsons will receive a
continuing service consulting fee based upon annual cash compensation and
years of serving FCFG.
Under a stock option agreement, Mr. Parsons will receive options for
8,000 shares of FCFG Common Stock for each of five years, with an exercise
price of the market value as of the grant date of such options. He will also
receive options for up to 15,000 shares of FCFG Common Stock for each of four
years if the Bank achieves certain performance goals.
6
<PAGE>
Michael D. Edwards. In connection with FCFG's recent acquisition of
Prairie Security Bank, on September 11, 1996, FCB entered into an employment
agreement with Mr. Edwards under which Mr. Edwards agreed to serve as the
President of the Bank following completion of the merger. Mr. Edwards will
receive a salary of $120,000 per annum, subject to a minimum ten percent
increase on September 1, 1997 and annual increases thereafter commensurate
with raises granted to other executive officers. In addition to his salary,
Mr. Edwards will be granted options to purchase shares of FCFG Common Stock,
at the market price as of the Effective Date. He will receive options for
20,000 shares of FCFG Common Stock, which will vest over five years with the
first 4,000 shares vested after twelve full months of employment, and an
additional 4,000 shares to vest each full year thereafter. The Employment
Agreement also provides that Mr. Edwards will receive options of up to 5,000
shares of FCFG common stock, dependent on the Combined Bank's year-end return
on assets, during each of the next four fiscal years. The shares will vest
over the four years according to the schedule set forth in the Employment
Agreement.
Executive Supplemental Income Plan
In 1992, the Company adopted an Executive Supplemental Income Plan
("ESIP") covering a senior group of management personnel. The post-retirement
benefit provided by the ESIP is designed to supplement a participating
officer's retirement benefits from social security, in order to provide the
officer with a certain percentage of final average income at retirement age.
Additionally, the ESIP provides a pre-retirement death benefit. These
benefits are funded by life insurance policies owned by the Company covering
the lives of participants.
EMPLOYEE COMPENSATION PLANS
Employee Stock Option and Restricted Stock Award Plan
In 1989, Shareholders of FCFG approved an Employee Stock Option and
Restricted Stock Award Plan ("Plan"). The purpose of the Plan is to provide
additional incentives to selected eligible key officers of FCFG and its
subsidiaries with the intention of (i) attracting and retaining the best
available personnel for positions of responsibility with the Company and its
subscribers, (ii) promoting the success of the business activities of the
Company, and (iii) increasing shareholder value. The incentives are in the
form of options to purchase shares of Common Stock and/or restricted stock
awards of Common Stock. The Company has the first right of refusal to
purchase any shares issued under the Plan prior to being sold on the open
market. At December 31, 1996, options covering 296,881 shares were granted
and unexercised under the plan. Options for 37,733 shares for grant remain in
the Plan.
Under the terms of the Plan, the exercise price of option shares will be
fair market value of the shares on the date the option is granted. All
options are incentive options under Section 422A of the Internal Revenue
Code, and are exercisable over a ten (10) year period from the date of the
grant.
In connection with the acquisition of Prairie Security Bank ("PSB") and
pursuant to the terms of the Amended and Restated Plan and Agreement of
Reorganization and Merger ("Agreement") all options granted under the
existing PSB Stock Option Plan were recognized by FCB as options to receive
FCFG Common Stock. At December 31, 1996, options covering 43,186 shares were
granted and unexercised under the plan.
Employee Stock Ownership Plan
FCFG provides retirement benefits to eligible employees through an
Employee Stock Ownership Plan that includes Internal Revenue Code Section
401(k) provisions (the "KSOP"). The KSOP was adopted as a 401(k) plan in
1987, and restated in 1992 to add employee stock ownership plan provisions.
Eligible employees may elect to contribute to the KSOP up to 12% of their
compensation (subject to Internal Revenue Service limitations), and these
contributions are matched by FCFG at a rate of 50% of up to 6% of employee's
contribution. The Board of Directors may make additional contributions to the
KSOP, based on the performance of the Company.
7
<PAGE>
All funds in the KSOP are held in trust. The KSOP is administered by a
Board of Trustees that consist of Messrs. Arneson, DeTray, Panowicz and
Parsons. Contributions to the KSOP are generally invested in shares of the
Company's Common Stock, although the Trustees have the discretion to invest
in such other prudent investments as deemed appropriate. Participants may,
with the consent of the Trustee, direct the investment of his or her Salary
Reduction Account and/or Profit Sharing Account in the Company's Common
Stock, (the goal of which shall be capital appreciation through investment in
the Company's Common Stock), and/or Mutual or Money Market Funds.
Upon retirement or termination of employment, a participant is entitled
to receive all Employer Basic Contributions, Employee Salary Reductions and
Rollover Contributions. The participant will also be eligible to withdraw
Employer Optional and Matching Contributions contributed by FCFG from
profits, subject to a vesting schedule. A participant becomes fully vested in
five years, with vesting of 20% each year after the first year of
participation.
Contributions to the KSOP for the years ended December 31 were $167,617
in 1996 and $165,114 in 1995.
8
<PAGE>
OWNERSHIP OF FCFG COMMON STOCK
In accordance with applicable rules, the following table provides
information concerning the only persons known to FCFG to have beneficial
ownership as of December 31, 1996 of more than five percent of its
outstanding Common Stock, and each of the named executive officers of FCFG
and the President of the Bank, and all executive officers and directors as a
group. Such rules require not only the disclosure of shares over which an
individual holds sole voting and investment power, but also shares over which
such individual shares voting and investment power. As a consequence, and as
indicated in the footnotes below, in certain instances this results in
duplication in the numbers and percentages reported in the table.
<TABLE>
<CAPTION>
NAME, ADDRESS AND NUMBER OF SHARES
RELATIONSHIP WITH BENEFICIALLY PERCENT OF CLASS
FCFG * OWNED BENEFICIALLY OWNED
- -------------------------- ----------------- -------------------
<S> <C> <C>
E. Paul DeTray 99,426(1) 5.53%
Director of FCFG
Ken F. Parsons 123,226(2) 6.76%
President and CEO of FCFG
Michael A. Price 93,150(3) 5.20%
Director
James F. Arneson 21,237(4) 1.23%
Executive Vice President and
CFO of FCFG and the Bank
FCFG Employee Stock 327,709(5) 16.17%
Ownership Plan ("KSOP")
Directors and Executive Officers
as a group (15) 447,818(6) 20.86%
</TABLE>
- ------------------------
* The address for all individuals is the same address as the Company
FCFG knows of no arrangements, the operation of which may at a subsequent
date result in a change of control of FCFG.
(1) Includes 45,335 shares held jointly with spouse; 15,789 shares held by
DeTray's Quality Homes; 7,150 held by a the DeTray Family Partnership;
14,000 unallocated shares held by the KSOP, considered beneficially owned
by Mr. DeTray as Trustee for the KSOP; and 10,617 shares which could be
acquired within 60 days by the exercise of stock options.
(2) Includes 50,424 shares held jointly with spouse; 13,740 and 1,429 held in
IRA accounts for the benefit of Mr. Parsons; 633 shares representing Mr.
Parsons ownership in an investment partnership; 868 shares held in an IRA
for the benefit of Mrs. Parsons; 5,301 shares held in the KSOP for the
benefit of Mr. Parsons; 14,000 unallocated shares held by the KSOP,
considered beneficially owned by Mr. Parsons as trustee for the KSOP; and
36,831 shares which could be acquired within 60 days by the exercise of
stock options.
(3) Mr. Price resigned as a director of FCFG and the Bank effective upon
October 31, 1996. Pursuant to the Stock Repurchase Agreement by and
between FCFG and Mr. Price, dated October 1996, FCFG purchased all shares
of FCFG Common Stock owned by Mr. Price on March 7, 1997, leaving Mr. Price
with no ownership interest in FCFG as of that date. Stock ownership
reported as of December 31, 1996 includes 1,110 shares owned by minor
children.
(4) Includes 899 shares held in the KSOP for the benefit of Mr. Arneson; 14,000
unallocated shares held by the KSOP, considered beneficially owned by Mr.
Arneson as trustee for the KSOP; and 6,174 shares which could be acquired
within 60 days by the exercise of stock options.
(5) In addition to the 14,000 unallocated shares held by the KSOP, includes
99,426, 123,226, 55,517, and 21,237 beneficially owned by Messrs. DeTray,
Parsons, Panowicz and Arneson, respectively, solely as trustees of the
KSOP, over which the KSOP disclaims beneficial ownership.
(6) Includes 14,000 unallocated shares held by the Company's KSOP which are
considered beneficially owned by Messrs. DeTray, Parsons, Panowicz and
Arneson. Also includes options for 105,900 shares owned by directors and
management, which are exercisable within 60 days of December 31, 1995.
9
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During 1996 many directors and executive officers of FCFG and the Bank
and their associates were also customers of the Bank. It is anticipated that
directors, executive officers, and their associates will continue to be
customers of the Bank in the future. The Bank has had, and expects to have in
the future, banking transactions in the ordinary course of its business with
directors, officers, principal shareholders and their associates, on
substantially the same terms, including interest rates and collateral, as
those prevailing at the same time for comparable transactions with others and
which do not involve more than the normal risk of collectability or present
other unfavorable features.
Stock Purchase Agreement. On October 31, 1996, FCFG entered into a Stock
Purchase and Sale Agreement ("Stock Purchase Agreement") with Michael A.
Price, a former director of FCFG, William Hartman, a former director of the
Bank, Kevin Byrne and Robert Coleman, directors of the Bank, and various
other parties related to Messrs. Price, Hartman, Bryne and Coleman ("Selling
Shareholders"). The transactions contemplated by the Stock Purchase Agreement
were consummated on March 7, 1997 as described below.
Under the terms of the Stock Purchase Agreement, FCFG purchased 122,570
shares of FCFG Common Stock held by the Selling Shareholders at $20.50 per
share ("Shares"). The aggregate purchase price for the FCFG Common Stock
owned by the Selling Shareholders and repurchased by the Company was
$2,512,685. FCFG purchased the Shares on March 7, 1997. The purchase price
for the Shares was negotiated to be $20.50 per share. Under the terms of the
Stock Purchase Agreement, FCFG also agreed to purchase certain options of
FCFG Common Stock ("Options") owned by Messrs. Byrne and Coleman. The Options
will be acquired by FCFG in January, 1998. The purchase price for the Options
was determined by using a price of $22.00 per share, less the exercise prices
applicable to the Options. The aggregate purchase price for the Options was
$1,132,940. The purchase prices for the Shares and for the Options was
unanimously approved by FCFG's Board at its meeting on October 31, 1996. Mr.
Price did not participate in the FCFG Board's consideration of the Stock
Purchase Agreement.
The Selling Shareholders acquired the Shares and the Options as a result
of the stock-for-stock merger of Northwest Community Bank with and into the
Bank in late 1995 ("NCB Merger"). Prior to the NCB Merger, Messrs. Price and
Hartman were directors of NCB. Following the NCB Merger, Messrs. Price and
Hartman served as directors of the Bank. Additionally, Mr. Price served as a
director of FCFG.
Following the NCB Merger, however, relations between FCFG and the Bank,
on the one hand, and those Selling Shareholders involved in FCFG's and the
Bank's management, on the other hand, became strained, primarily as a result
of differing philosophies regarding the conduct and future development of
FCFG's and the Bank's businesses. FCFG's management believed that the
situation was exacerbated by certain disputes, since resolved, which occurred
subsequent to the NCB Merger. The FCFG Board believed that the existence of
disaffected shareholders and directors had a continuing negative effect on
the efficient business operations of FCFG and the Bank. Additionally the FCFG
Board believed that the acquisition of the Selling Shareholders' shares and
the concurrent resignations of Messrs. Price and Hartman would allow the Bank
to better assimilate and utilize the people and assets, now part of the Bank,
which constituted NCB prior to the NCB Merger. Accordingly, the FCFG Board
approved the Stock Purchase Agreement on October 31, 1996.
FCFG funded a significant portion of the purchase price for the Shares
and Options by means of a dividend declared and paid to FCFG by the Bank, as
well as the Bank's repayment of an advance previously made to it by FCFG to
fund improvements to the Bank's Lacey offices.
Kenneth Wilcox Loan. In April, 1993, Mr. Kenneth Wilcox, a director of
FCFG and FCB, loaned $450,000 to IMS, a wholly owned subsidiary of FCFG, for
the purpose of acquiring data processing equipment to be used by IMS in its
business. The term of the loan is five years, and interest is paid at a rate
.75% over a prime rate (9.0% at December 31, 1996). Management of FCFG
believes that the terms of the loan are at least as favorable as those that
would have been received from an unaffiliated party. At December 31, 1996,
the amount outstanding under this obligation was $210,110.77.
10
<PAGE>
Section 16(a) Beneficial Ownership Reporting Compliance
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.
RELATIONSHIP WITH INDEPENDENT PUBLIC ACCOUNTANTS
The firm of Knight, Vale & Gregory Inc. P.S. performed the audit of the
consolidated financial statements for FCFG and its wholly owned subsidiaries,
for the year ended December 31, 1996. Representatives of Knight, Vale &
Gregory, Inc., P.S. are expected to be present at the annual meeting, will
have the opportunity to make a statement if they so desire, and will be
available to respond to appropriate questions.
OTHER MATTERS
The Board of Directors knows of no other matters to be brought before
this Annual Meeting. However, if other matters should properly come before
the meeting, it is the intention of the persons named in the Proxy to vote
the Proxy in accordance with the recommendations of management on such
matters.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's discussion and analysis of First Community Financial Group,
Inc. (the Company) should be read in conjunction with the accompanying
consolidated financial statements.
On November 30, 1995 the Company completed the acquisition of Northwest
Community Bank, a two branch bank headquartered in Tacoma, Washington with
total assets of approximately $45 million. This expanded the Company's market
area into Pierce County, and added 25% to our branch network and
approximately 38% to total assets. Considerable effort was made during the
year to solidify our market presence in that area by recruiting solid,
experienced bankers, and by strengthening the Bank's relationships with those
customers, most of whom were using only one of the many available services.
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 allows
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 following financial information does not
include Prairie Security Bank's analysis of financial position or results of
operations.
On March 3, 1997 the Company was notified that it was a successful bidder
in the sale of branches of Wells Fargo Bank located in Hoquiam, Winlock ,
Toledo, Shelton and Montesano, Washington. The completion of this acquisition
is expected to occur in the third quarter of 1997, and will add approximately
$50 million in deposits. The branches in Winlock, Toledo and Montesano
represent further expansion of the Company's market area. The Company's
existing branch in Hoquiam will be consolidated into the newly acquired
facility, which is large enough to accommodate the customers of both
branches. The branch facility in Shelton and the accompanying deposits will
be resold to another financial institution simultaneously with its purchase.
11
<PAGE>
RESULTS OF OPERATIONS
The Company completed one of its most profitable years in 1996 with
consolidated net income of $1,861,000. This is more than double 1995 earnings
of $920,000, which suffered due to costs associated with the acquisition of
Northwest Community Bank. This acquisition was accounted for using the
pooling-of-interests accounting method, whereby results of operations and
financial position are reflected in the Company's financial statements as
though the acquisition transpired at the beginning of the first period
presented. Consequently, the results of operations of Northwest Community
Bank prior to the acquisition appear in the 1995 financial statements.
Return on average assets for 1996 increased from .53% in 1995 to 1.08%,
and return on average equity increased from 4.71% to 9.30%. Earnings per
share increased from $.51 in 1995 to $1.03 in 1996.
Net Interest Income
Net interest income in 1996 decreased $24,000, or less than 1%, from
1995. The net interest margin increased 4 basis points from 1995 to 6.25%.
Interest income increased by $47,000 over 1995 to $15,278,000. Loan
income increased $613,000 overall due to an increase in the average volume of
loan balances. The income effect of this volume increase was partially offset
by a decline of 29 basis points in the average yield of the loan portfolio.
Interest income derived from other earning components of the balance sheet,
such as Federal funds sold, deposits in other banks and investments, declined
$566,000 from the prior year due almost entirely to the shift of these funds
into the loan portfolio.
Interest expense increased a net of $71,000 over 1995 to $5,656,000.
Interest expense on time deposits increased $305,000 resulting from an
increase in their volume. The effects of the volume increase were partially
offset by a drop in the average cost of these deposits 7 basis points. The
interest expense on savings and interest bearing transaction accounts
decreased $218,000 due both to a decline in the volume of such deposits and a
14 basis point decline in their average cost.
An analysis of the change in net interest income is as follows (thousands):
<TABLE>
<CAPTION>
1996 COMPARED TO 1995 1995 COMPARED TO 1994
---------------------- ---------------------
INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO
--------------------------- ---------------------------
VOLUME RATE NET VOLUME RATE NET
-------- ------ ----- ------- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Interest earned on:
Loans............................................................. $ 943 $(330) $ 613 $1,841 $(133) $1,708
Federal funds sold and deposits in banks.......................... (416) (9) (425) (50) 223 273
Investment securities............................................. (165) 24 (141) -- 79 79
Total interest income............................................. 362 (315) 47 1,891 169 2,060
Interest paid on:
Savings, NOW and MMA.............................................. (131) (87) (218) 38 217 266
Time deposits..................................................... 351 (46) 305 704 798 1,602
Other borrowings.................................................. (31) 15 (16) (16) 54 38
Total Interest expense 189........................................ 189 (118) 71 726 1,069 1,795
Net interest income............................................... $ 173 $(197) $ (24) $1,165 $(900) $ 265
</TABLE>
The change in interest due to both rate and volume has been allocated to
volume and rate changes in proportion to the relationship of the absolute
dollar amounts of the change in each.
12
<PAGE>
Average consolidated statements of financial position and analysis of net
interest spread were as follows (dollars in thousands):
<TABLE>
<CAPTION>
1996 1995
INTEREST INTEREST
AVERAGE INCOME AVERAGE AVERAGE INCOME AVERAGE
BALANCE (EXPENSE) RATES BALANCE (EXPENSE) RATES
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Assets
Earning Assets:
Loans (1)...................................... $131,187 $14,017 10.68% $122,237 $13,404 10.97%
Federal funds sold and interest bearing deposits
in banks........................................ 9,731 544 5.59% 17,178 969 5.64%
Investment securities........................... 13,003 717 5.51% 15,991 858 5.37%
Total earning assets and interest income......... 153,921 15,278 9.93% 155,406 15,231 9.80%
---------- ---------- -------------- ---------- --------- ---------
Other Assets:
Cash and due from banks......................... 9,150 8,126
Bank premises and equipment..................... 7,480 6,998
Other assets.................................... 3,645 3,936
Allowance for credit losses..................... (1,417) (1,299)
Total Assets..................................... $172,779 $173,167
-------- --------
-------- --------
- ----------------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Interest bearing liabilities:
Deposits:
Savings, NOW, and
Money Market Deposits.......................... $58,616 (1,782) 3.04% $ 62,828 (2,000) 3.18%
Time deposits.................................. 66,201 (3,764) 5.69% 60,007 (3,459) 5.76%
---------- ---------- ------------ ---------- --------- ---------
Total interest bearing deposits.................. $ 124,817 (5,546) 4.44% $122,835 (5,459) 4.44%
Other borrowings................................. 1,137 (110) 9.67% 1,430 (126) 8.81%
---------- ---------- ------------ ---------- --------- ---------
Total interest bearing liabilities and interest
expense......................................... 125,954 (5,656) 4.49% 124,265 (5,585) 4.49%
---------- ---------- ------------ ---------- --------- ---------
Non-interest bearing deposits.................... 26,320 28,088
Other liabilities 490............................ 1,274
Stockholders' equity............................. 20,015 19,540
Total liabilities, stockholders' equity and net
interest income................................. $ 172,779 $ 9,622 $173,167 $9,646
---------- ---------- ------------ ---------- --------- ----------
---------- ---------- ------------ ---------- --------- ----------
- ----------------------------------------------------------------------------------------------------------------------------
Net interest income as a percentage of
average earning assets:
Interest Income............................... 9.93% 9.80%
Interest Expense.............................. 3.68% 3.59%
----- -----
Net Interest Income............................... 6.25% 6.21%
----- -----
----- -----
</TABLE>
- ------------------------
(1) For purposes of these computations, non-accrual loans are included in the
average loan balance outstanding. Loan fees and late charges of $1,444,000
and $1,527,000 are included in interest income in 1996 and 1995.
13
<PAGE>
Non-Interest Income
Total non-interest income increased 6% or $101,000 from 1995 due to a 14%
increase in mortgage loan origination fee income and to a 12% increase in
income derived from service charges on deposit accounts.
With the current and anticipated interest rate environment, coupled with
an expanded sales force and a larger branch network, mortgage volume is
expected to increase in 1997.
Non-Interest Expense
Non-interest expense decreased $1,283,000, or 13% from 1995. A decline of
$972,000 in salaries and employee benefit expense and a $484,000 decline in
other non-interest expense contributed significantly to this overall
decrease. Occupancy and equipment expense increased $173,000, reflecting the
Company's continued growth including the opening of a new branch in Centralia
during the year. As previously discussed, 1995 contains expenses associated
with the acquisition of Northwest Community Bank including compensation
related costs of approximately $875,000 and other expenses approximating
$300,000. After eliminating these 1995 expenses, non-interest expense in 1996
declined $108,000 from 1995, as the result of Management's continued emphasis
on financial and operational efficiency.
Financial Condition
Overview
Consolidated total assets declined less than 1% to $176,501,000. This
decrease resulted from the effect of a $2,737,000 decrease in deposits, which
was partially mitigated by in increase in capital of $1,679,000. Growth is
expected in the coming year as further market penetration is achieved through
the existing branch banking network, as well as further geographic expansion.
Earning assets shifted from lower yielding short-term instruments and
investment securities into the loan portfolio, which produces substantially
higher yields. Loans made up 85% of total earning assets in 1996, compared to
81% in 1995.
Composition of Average Earning Assets:
1996 1995
Loans
Commercial......................... 17.44% 16.03%
Real Estate Construction........... 9.21% 10.01%
Real Estate Mortgage............... 54.28% 48.87%
Consumer........................... 4.32% 4.51%
Total Loans........................... 85.23% 81.42%
Federal funds paid and interest
bearing deposits with banks........ 8.32% 9.40%
Investment securities................. 8.45% 9.19%
Total................................. 100.00% 100.00%
Investments
The Company's investment portfolio decreased $3,710,000 during the year to
$10,695,000 at December 31, 1996. Included in the portfolio are securities
classified as "held-to-maturity", which are recorded at an amortized cost of
$3,182,000 as well as securities classified as "available-for-sale", which
are recorded at their fair value of $7,513,000. Because the
available-for-sale portfolio is required to be carried at fair value, its
carrying value fluctuates with changes in market factors, primarily interest
rates.
14
<PAGE>
The carrying amount of securities and the approximate fair values were as
follows (dollars in thousands):
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- ------------- ------------- -----------
<S> <C> <C> <C> <C>
Available-for-Sale Securities
December 31, 1996
Equity securities............................ $ 2,053 $ -- $ -- $ 2,053
U.S. Government and agency securities........ 3,557 6 27 3,536
Corporate securities......................... 855 -- 1 854
Mortgage backed securities................... 745 -- 11 734
State and municipal securities............... 323 13 -- 336
$ 7,533 $ 19 $ 39 $ 7,513
December 31, 1995
Equity securities............................ $ 1,821 $ -- $ -- $ 1,821
U.S. Government and agency securities........ 3,753 4 18 3,739
Corporate securities......................... 297 1 -- 298
Mortgage backed securities................... 1,012 -- 58 954
State and municipal securities............... 324 7 -- 331
$ 7,207 $ 12 $ 6 $ 3,249
Held-to-Maturity Securities
December 31, 1996
U.S. Government and agency securities........ $ 1,251 $ 4 $ -- $ 1,255
Corporate securities......................... 251 -- -- 251
State and municipal securities............... 1,680 69 6 1,743
$ 3,182 $ 73 $ 76 $ 7,143
December 31, 1995
U.S. Government and agency securities........ $ 4,214 $ 6 $ -- $ 4,220
Corporate securities......................... 822 21 -- 843
State and municipal securities............... 2,226 56 -- 2,282
$ 7,262 $ 83 $ -- $ 7,345
</TABLE>
The stated maturities of debt securities were as follows (dollars in
thousands):
<TABLE>
<CAPTION>
AVAILABLE-FOR-SALE
HELD-TO-MATURITY SECURITIES SECURITIES
--------------------------------- -------------------------------
ESTIMATED ESTIMATED
WEIGHTED WEIGHTED
AMORTIZED FAIR AVERAGE AMORTIZED FAIR AVERAGE
COST VALUE YIELD COST VALUE YIELD
----------- --------- --------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Due in one year or less............................ $ 1,937 $ 1,953 5.65% $ 1,511 $ 1,498 5.09%
Due after one year through five years.............. 692 712 5.93% 3,969 3,962 5.83%
Due after five years through ten years............. 553 584 5.91% --- ---
$ 3,182 $ 3,249 $ 5,480 $ 5,460 ---
</TABLE>
Mortgage backed securities are allocated based on their anticipated
principal repayment.
15
<PAGE>
LOANS
Loan demand in the Company's market area slowed somewhat in 1996 as
portfolio loans grew a modest 3.5% or $4.5 million during 1996, compared to an
8% growth rate during 1995.
The aggregate maximum amount the Bank may lend to a single customer
increased from approximately $1.5 million at the beginning of 1995 to over $3
million, primarily as the result of the acquisition of Northwest Community Bank
(NCB) in November 1995. This gives the Bank the ability to serve a broader
spectrum of customers, specifically those with larger credit needs.
Real estate mortgage loans, the largest component of the portfolio,
increased $8,114,000 during the year partially due to the increased lending
limits. Other components of the portfolio remained relatively stable.
The composition of the loan portfolio was as follows (dollars in thousands):
<TABLE>
<CAPTION>
1996 % OF 1995 % OF
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Commercial................... $ 27,353 20.94% $ 28,259 22.40%
Real estate construction..... 14,071 10.77% 15,701 12.45%
Real estate mortgage......... 83,242 63.72% 75,128 59.55%
Consumer..................... 5,966 4.57% 7,066 5.60%
$130,632 100.00% $ 126,154 100.00%
</TABLE>
DEPOSITS
Total deposits decreased a net of 1.75% during 1996, or $2,737,000. Time
deposits, which bear interest at higher rates than other deposits, increased
$7,847,000, while non-interest bearing deposits decreased $4,656,000 and savings
and NOW accounts declined $5,928,000. This represents a shift in the ratio of
time deposits to total deposits from 39.8% to 45.6% at December 31, 1995 and
1996, respectively.
<TABLE>
<CAPTION>
1996 1995
----------------- ---------------------
AMOUNT RATE AMOUNT RATE
---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Demand Deposits............ $ 24,719 $ 29,375
Interest bearing demand.... 42,541 3.09% 41,573 3.22%
Savings Accounts........... 16,235 2.91% 23,131 3.13%
Other time deposits........ 69,939 5.69% 62,092 5.76%
TOTAL...................... $ 153,434 $ 156,171
</TABLE>
16
<PAGE>
Certificates of deposit at December 31, 1996 are scheduled to mature as
follows (dollars in thousands):
UNDER $100,000
$100,000 AND OVER TOTAL
----------- ---------- --------------
0-90 days........... $ 10,459 $ 4,615 $15,074
91-180 days......... 13,959 2,765 16,724
181-365 days........ 24,381 5,632 30,013
Over 1 year......... 6,105 2,023 8,128
--------- --------- ----------
54,904 $15,035 $69,939
ASSET QUALITY
Classified assets, which consist of non-accrual loans, accruing loans past
due 90 days or more and foreclosed real estate, were as follows (dollars in
thousands):
1996 1995
------- ------
Non-accrual loans......... $1,898 $1,427
Accruing loans past due
90 days or more......... 1,238 401
Foreclosed real estate.... 1,063 385
-------- ---------
$4,199 $2,213
Increases in non-accrual loans and accruing loans past due 90 days or more
result from loans acquired with Northwest Community Bank, and generally
represent loans that are well secured, and on which material losses are not
expected.
The Company is not aware of any loans continuing to accrue interest at
December 31, 1996 that represent or result from trends or uncertainties which
management reasonably expects will materially impact future operating results,
liquidity, or capital resources, or represent material credits about which
management is aware of any information which would raise serious doubts as to
the ability of such borrowers to comply with the loan repayment terms.
ALLOWANCE FOR CREDIT LOSSES
The allowance for credit losses reflects management's current estimate of
the amount required to absorb losses on existing loans and commitments to extend
credit, as well as an additional amount to provide a supplementary margin of
safety. Determination of the appropriate level of the allowance is based on an
analysis of various factors including historical loss experience based on
volumes and types of loans; volumes and trends in delinquencies and non-accrual
loans; trends in portfolio volume; results of internal and independent external
credit reviews; and anticipated economic conditions. The loss factors used in
the analysis represent amounts substantially in excess of the Bank's actual loss
experience, and are used to provide an additional margin of safety. An analysis
of the adequacy of the allowance is subject to quarterly review by the Board of
Directors. Based on this analysis, management considers the allowance for credit
losses to be adequate.
17
<PAGE>
Transactions in the allowance for credit losses for the years ended December
31, 1996 and 1995 are as follows (dollars in thousands):
1996 1995
--------- ---------
Balance at beginning of year.................... $ 1,376 $ 1,250
Provision charged to non-interest expense....... 261 236
Losses charged to allowance
Commercial.................................... 34 138
Real Estate Mortgage............................ 116 12
Real Estate Construction........................ -- --
Consumer........................................ 77 26
--------- ---------
(227) (176)
Recoveries credited to allowance................ 10 66
Net charge-offs................................. (217) (110)
Balance at end of year.......................... $ 1,420 $,376
Ratio of net charge-offs to Average Loans
Outstanding .................................. .17% .09%
It is the Company's policy charge-off any loan or portion of a loan that is
deemed uncollectible in the ordinary course of business. The entire allowance
for credit losses is available to absorb such charge-offs. The Company has
history to draw from regarding loan losses and therefore allocates its allowance
for credit losses primarily on the basis of historical occurrence. Based on
certain characteristics of the portfolio, losses can be anticipated for major
loan categories. In the following table, the allowance for possible credit
losses at December 31, 1996 and 1995 has been allocated among major loan
categories based on a number of factors including quality, volume, economic
outlook and other business considerations (dollars in thousands):
<TABLE>
1996 1995
------------------------ ------------------------
<S> <C> <C> <C> <C>
% OF TOTAL % OF TOTAL
ALLOWANCE ALLOWANCE ALLOWANCE ALLOWANCE
----------- ----------- ----------- -----------
Commercial Loans.................................................. $ 412 29.0% $295 21.4%
Real Estate Loans................................................. 887 62.5% 953 69.3%
Consumer Loans.................................................... 121 8.5% 128 9.3%
TOTAL ALLOWANCE................................................... $ 1,420 100.0% $ 1,376 100.0%
</TABLE>
LIQUIDITY AND RATE SENSITIVITY
The Company's assets and liabilities are managed to maximize long-term
shareholder returns by optimizing net interest income within the constraints of
maintaining high credit quality, conservative interest rate risk disciplines and
prudent levels of liquidity. The Asset and Liability Committee meets regularly
to monitor the composition of the balance sheet, to assess current and projected
interest rate trends, and to formulate strategies consistent with established
objectives for liquidity, interest rate risk and capital adequacy. Liquidity
management involves the ability to meet cash flow requirements of customers who
may be either depositors wanting to withdraw funds or borrowers needing
assurance that sufficient funds will be available to meet their credit needs.
Liquidity is generated from both internal and external sources. Internal sources
are those assets that can be converted to cash with little or no risk of loss.
These include overnight investments in Federal funds sold and investment
18
<PAGE>
securities, particularly those of shorter maturity, and are the principal source
of asset liquidity. At December 31, 1996, cash, Federal funds sold and
investment securities maturing within one year totaled $25,309,000. External
sources refer to the ability to attract new liabilities and capital. They
include increasing deposits, Federal funds purchased, and the issuance of
capital and debt securities. At December 31, 1996, Federal funds borrowing lines
of credit totaled $3,300,000 and were not materially used during 1996. The Bank
also has preestablished borrowing lines available with the Federal Home Loan
Bank of Seattle of up to 10% of total assets (approximately $17 million at
December 31, 1996).
Management believes the Bank's liquidity position at December 31, 1996, was
adequate to meet its short term funding requirements.
Interest rate sensitivity is closely related to liquidity, as each is
directly affected by the maturity of assets and liabilities. The Company's net
interest margin is affected by changes in the level of market interest rates and
the mix of rate sensitive assets and liabilities. Management's objectives are to
monitor and control interest rate risk and ensure predictable and consistent
growth in net interest income.
Management considers any asset or liability which matures, or is subject to
repricing within one year to be interest sensitive, although continual
monitoring is performed for other time intervals as well. The difference between
interest sensitive assets and liabilities for a defined period of time is known
as the interest sensitivity "gap", and may be either positive or negative. If
positive, more assets reprice before liabilities. If negative, the reverse is
true. The accompanying table depicts variable rate instruments in the time
period the balance are eligible for repricing and fixed rate instruments
according to repayment schedules. The analysis provides a general measure of
interest rate risk but does not address complexities such as prepayment risk,
interest rate floors and ceilings imposed on financial instruments, interest
rate dynamics and customers' response to interest rate changes. Currently the
Bank's interest sensitive gap is negative within one year. Assuming that general
market interest rate changes affected the repricing of assets and liabilities in
equal magnitudes, this indicates that the effects of rising interest rates on
the Company would be a decrease in the net interest margin, whereas falling
interest rates would cause a corresponding increase in the margin.
Asset and Liability Maturity Reporting Schedule
December 31, 1996
After One
Within But Within After
Dollars in thousands One Year Five Years Five years Total
Loans .......................... $83,148 $59,140 $6,145 $128,734
Securities:
Available for sale............. 3,551 3,962 -- 7,518
Hold to maturity............... 1,937 692 583 3,182
Interest bearing deposits
with banks................... 10,141 -- -- 10,141
Federal bonds sold............... 4,000 -- -- 4,000
Total Earning Assets 82,777 83,796 6,999 153,570
Deposits:
Savings, NOW and money market... $6,778 -- -- $ 6,776
Time certificates of deposit.... 61,611 8,128 -- $ 9,939
Long-term borrowings............. 555 739 1,294
Total Interest Bearing
Liabilities................... 121,142 8,867 0 190,000
Net Interest Rate Sensitivity Gap ($28,368) $54,927 $6,999 675,661
Capital
The Company and the Bank exceeded all current regulatory capital
requirements to be classified as well capitalized, the highest regulatory
standard. In order to be categorized as a well-capitalized institution, the FDIC
requires banks it regulates to maintain a leverage ratio, defined as Tier I
capital divided by total average assets, of 5%; total capital of at least 10% of
risk-weighted assets; and core capital of at least 6% of risk-weighted assets.
At December 31, 1996, First Community Bank's leverage ratio was 10.41%, the
ratio of total capital to risk-weighted assets was 13.10%, and the ratio of core
capital to risk-weighted assets was 12.14%. The Company's leverage ratio at
December 31, 1996 was 11.96%, the ratio of total capital to risk-weighted assets
was 15.77%, and the ratio of core capital to risk-weighted assets was 14.78%.
No cash dividends were paid in 1996 or 1995.
19
<PAGE>
INFORMATION CONCERNING SHAREHOLDER PROPOSALS
Proposals of shareholders intended to be presented at the Annual Meeting of
Shareholders of FCFG scheduled to be held April 1998, must be received for
inclusion in the Proxy Statement and form of Proxy relating to that meeting by
November 30, 1997.
BY ORDER OF THE BOARD OF DIRECTORS
Lacey, Washington Lori L. Fobes
March 31, 1997 Secretary
IMPORTANT: An affirmative vote of the holders of a majority of the
outstanding shares is required to approve Item 1. The prompt return of proxies
will save FCFG the expense of further requests for proxies, you are urged to
SIGN AND RETURN THE ENCLOSED PROXY PROMPTLY. If you do attend the meeting, you
may then withdraw your Proxy. Any person giving a Proxy may revoke it prior to
its exercise.
20
<PAGE>
CONSOLIDATED
FINANCIAL
STATEMENTS
<PAGE>
TABLE OF CONTENTS
<TABLE>
PAGE
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INDEPENDENT AUDITOR'S REPORT.............................................. F-1
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets............................................... F-2
Consolidated Statements of Income......................................... F-3
Consolidated Statements of Stockholders' Equity........................... F-4
Consolidated Statements of Cash Flows..................................... F-5
Notes to Consolidated Financial Statements................................ F-6
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
BOARD OF DIRECTORS
First Community Financial Group, Inc.
LACEY, WASHINGTON
We have audited the accompanying consolidated balance sheets of First
Community Financial Group, Inc. and Subsidiaries as of December 31, 1996 and
1995, and the related consolidated statements of income, stockholders' equity
and cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of First
Community Financial Group, Inc. and Subsidiaries as of December 31, 1996 and
1995, and the results of their operations and their cash flows for the years
then ended, in conformity with generally accepted accounting principles.
KNIGHT, VALE & GREGORY, INC., P.S.
February 5, 1997, except for Note 19, for
which the date is March 6, 1997
TACOMA, WASHINGTON
<PAGE>
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
First Community Financial Group, Inc. and Subsidiaries
December 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Assets
Cash and due from banks (Note 3)............................................................. $ 8,467 $9,959
Interest bearing deposits in other banks..................................................... 10,141 11,982
Federal funds sold........................................................................... 4,000 2,750
Securities available for sale (Note 4)....................................................... 7,513 7,143
Securities held to maturity (fair value
1996--$3,249, 1995 -$7,345) (Note 4)....................................................... 3,182 7,262
Loans held for sale.......................................................................... 726 1,478
Loans (Notes 5, 11 and 12)................................................................... 130,632 126,154
Allowance for credit losses (Note 5)......................................................... (1,420) (1,376)
Loans--net................................................................................... 129,212 124,778
Premises and equipment (Note 6).............................................................. 7,593 7,840
Foreclosed real estate....................................................................... 1,063 385
Accrued interest receivable.................................................................. 834 985
Cash value of life insurance................................................................. 2,088 1,650
Other assets................................................................................. 1,682 1,620
Total assets................................................................................. $176,501 $177,832
Liabilities
Deposits:
Non-interest bearing demand.................................................................. $24,719 $29,375
Savings and NOW.............................................................................. 58,776 64,704
Time deposits (Note 7)....................................................................... 69,939 62,092
Total deposits............................................................................... 153,434 156,171
Long term debt (Note 8)...................................................................... 1,294 1,237
Accrued interest payable..................................................................... 229 341
Other liabilities............................................................................ 625 843
Total liabilities............................................................................ 155,582 158,592
Commitments and Contingent Liabilities (Notes 11 and 12)..................................... -- --
Stockholders' Equity
Preferred stock, no par value; 200,000 shares authorized, none issued........................ -- --
Common stock, par value $2.50 per share; 10,000,000 shares authorized, 1,698,505 shares
issued in 1996 and 1,612,472 shares issued in 1995 (Notes 12, 13, and 14).................. 4,246 4,031
Surplus...................................................................................... 13,745 12,311
Retained earnings............................................................................ 3,186 2,940
Net unrealized depreciation on available for sale securities, net of tax of $7 in 1996 and
$22 in 1995 (Note 4)....................................................................... (13) (42)
Guarantee of KSOP Obligation (Notes 8 and 12)................................................ (245) --
Total stockholders' equity................................................................... 20,919 19,240
Total liabilities and stockholders' equity................................................... $176,501 $177,832
</TABLE>
See notes to consolidated financial statements
F-2
<PAGE>
Consolidated Statements of Income
(Dollars in thousands, except per share data)
First Community Financial Group, Inc. and Subsidiaries
Years Ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
------------- ------------
<S> <C> <C>
Interest Income
Loans........................................................ $ 14,017 $ 13,404
Federal funds sold and deposits in banks..................... 544 969
Investment securities:
Taxable...................................................... 579 694
Non-taxable.................................................. 138 164
Total interest income........................................ 15,278 15,231
Interest Expense
Deposits..................................................... 5,546 5,459
Other........................................................ 110 126
Total interest expense....................................... 5,656 5,585
Net interest income.......................................... 9,622 9,646
Provision for Credit Losses (Note 5)......................... 261 236
Net interest income after provision for credit losses........ 9,361 9,410
Non-Interest Income
Service charges on deposit accounts.......................... 1,105 988
Origination fees and gains on sales of loans................. 443 388
Other operating income....................................... 276 347
Total non-interest income.................................... 1,824 1,723
Non-Interest Expenses
Salaries..................................................... 3,753 4,634
Employee benefits (Note 12).................................. 779 870
Occupancy.................................................... 618 548
Equipment.................................................... 835 732
Other (Note 18).............................................. 2,621 3,105
Total non-interest expenses.................................. 8,606 9,889
Operating income before income taxes......................... 2,579 1,244
Income Taxes (Note 9)........................................ 718 324
Net income................................................... $ 1,861 $920
Earnings per Common Share and Common Equivalent Share
(Notes 1 and 13)........................................... $ 1.03 $ .51
Average number of common and equivalent shares outstanding 1,814,454 1,811,892
Earnings per Common Share--Assuming Full Dilution
(Notes 1 and 13)........................................... $ 1.01 $ .51
Average number of common and equivalent shares outstanding 1,837,362 1,816,728
</TABLE>
See notes to consolidated financial statements
F-3
<PAGE>
Consolidated Statements of Stockholders' Equity
(Dollars in thousands)
First Community Financial Group, Inc. and Subsidiaries
Years Ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
NET UNREALIZED
DEPRECIATION ON GUARANTEED
COMMON RETAINED AVAILABLE-FOR- KSOP
STOCK SURPLUS EARNINGS SALE SECURITIES OBLIGATION TOTAL
----------- --------- ----------- ----------------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994........................ $ 3,823 $ 10,170 $ 4,093 ($ 100) -- $17,986
Net income........................................ -- -- 920 -- -- 920
Common stock issued............................... 28 41 -- -- -- 69
Stock options exercised........................... 57 155 -- -- -- 212
5% Stock dividend (Note13) 123 763 (891) -- --
Transfer from retained earnings................... -- 1,182 (1,182) -- -- --
Change in unrealized
depreciation on available
for sale securities, net of tax.................. -- -- -- 58 -- 58
Balance, December 31, 1995........................ $ 4,031 $ 12,311 $ 2,940 ($ 42) -- $19,240
Net income........................................ -- -- 1,861 -- -- 1,861
Stock options exercised........................... 14 31 -- -- -- 45
5%Stock dividend (Note 13)........................ 201 1,584 (1,796) -- --
Transfer to retained earnings..................... -- (181) 181 -- -- --
Change in unrealized
depreciation on available
for sale securities, net of tax.................. -- -- -- 29 -- 29
Net Increase in Guaranteed
KSOP Obligation (Notes 8 and 12)................ -- -- -- -- (245) (245)
Balance, December 31, 1996........................ $ 4,246 $ 13,745 $ 3,186 $ (13) $ (245) $20,919
</TABLE>
See notes to consolidated financial statements
F-4
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
First Community Financial Group, Inc. and Subsidiaries
Years Ended December 31, 1996 and 1995
<TABLE>
1996 1995
--------------- ---------
<S> <C> <C>
Cash Flows from Operating Activities
Net income......................................................... $ 1,861 $ 920
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for credit losses........................................ 261 236
Depreciation and amortization...................................... 772 703
Deferred income taxes.............................................. 16 62
Stock dividends received........................................... (81) --
Gain on sale of loans.............................................. -- (78)
Origination of loans held for sale................................. (18,966) (12,590)
Proceeds from sales of loans held for sale......................... 19,718 11,366
Net increase in cash value of life insurance....................... (438) (591)
Gain on sale of foreclosed real estate............................. (41) --
Other--net......................................................... (192) (485)
Net cash provided by operating activities.......................... 2,910 513
Cash Flows from Investing Activities
Net increase in interest bearing deposits in other banks........... (1,250) (6,515)
Net decrease in Federal funds sold................................. 1,841 5,905
Purchases of securities held to maturity........................... -- (2,133)
Purchases of securities available for sale ........................ (2,360) (2,472)
Proceeds from maturities of securities held to maturity............ 4,045 3,944
Proceeds from maturities of securities available for sale.......... 2,093 2,028
Net increase in loans.............................................. (5,910) (10,886)
Proceeds from sales of foreclosed assets........................... 572 1,034
Additions to premises and equipment................................ (575) (3,075)
Other--net......................................................... 33 29
Net cash used in investing activities.............................. (1,511) (12,141)
Cash Flows from Financing Activities
Net increase (decrease) in demand deposits, NOW and savings
accounts......................................................... (10,584) 4,444
Net increase in time deposit accounts.............................. 7,847 10,184
Net decrease in short-term borrowings.............................. -- (500)
Proceeds from sale of common stock................................. 45 281
Proceeds from issuance of long-term debt........................... -- 200
Repayment of long-term debt........................................ (188) (76)
Payment for fractional shares...................................... (11) (5)
Net cash provided by financing activities.......................... (2,891) 14,528
Net change in cash and due from banks.............................. (1,492) 2,900
Cash and Due from Banks
Beginning of year.................................................. 9,959 7,059
End of year........................................................ $ 8,467 $ 9,959
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest........................................................... $ 5,768 $ 5,540
Income taxes....................................................... 805 439
Supplemental Schedule of Non-Cash Investing Activities
Foreclosed real estate acquired in settlement of loans............. $ 1,708 $ 1,062
Change in depreciation of available for sale securities, net....... 29 58
Net increase in guarantee of KSOP obligation....................... 245 --
Reclassification of securities held to maturity to
securities available for sale .................................. -- 2,059
</TABLE>
See notes to consolidated financial statements
F-5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FIRST COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARIES
DECEMBER 31, 1996 AND 1995
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of First
Community Financial Group, Inc. (the Company) and its wholly owned subsidiaries,
First Community Bank of Washington (FCB) and Information Management Systems,
Inc. (IMS). FCB is referred to as "the Bank". FCB Financial Services, Inc., a
wholly owned subsidiary of FCB, is also included in the consolidated financial
statements. Premises, Inc., which was a wholly owned subsidiary of the Company
prior to 1996, was merged into FCB during 1996. All significant intercompany
transactions and balances have been eliminated.
NATURE OF OPERATIONS
The Company provides commercial banking services in Washington State through
ten branches concentrated in and around Thurston, Grays Harbor, Pierce and Lewis
Counties. Additionally, the Company provides real estate mortgage lending
services and the sale of non-deposit investment products through its branch
network. The Company's primary source of revenue is providing loans to customers
who are predominately small and middle-market businesses and middle-income
individuals.
FINANCIAL STATEMENT PRESENTATION
The financial statements have been prepared in accordance with generally
accepted accounting principles and practices within the banking industry. In
preparing the financial statements, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities as of the
date of the balance sheet, and revenues and expenses for the period. Actual
results could differ significantly from those estimates. Material estimates that
are particularly susceptible to change relate to the determination of the
allowance for credit losses and the valuation of real estate acquired in
connection with foreclosures or in satisfaction of loans. In connection with the
determination of the allowance for credit losses and the valuation of foreclosed
real estate, management obtains independent appraisals for significant
properties.
Certain prior year amounts have been reclassified to conform to 1996
presentation.
SECURITIES AVAILABLE FOR SALE
Securities available for sale consist of debt and certain equity securities
not classified as trading or as securities held to maturity. Securities
available for sale are reported at fair value. Unrealized gains and losses, net
of the related deferred tax effect, are reported as a net amount in a separate
component of stockholders' equity. Realized gains and losses on securities
available for sale, determined using the specific identification method, are
included in earnings. Amortization of premiums and accretion of discounts are
recognized in interest income over the period to maturity.
F-6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FIRST COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARIES
DECEMBER 31, 1996 AND 1995
Note 1--Summary of Significant Accounting Policies (continued)
SECURITIES HELD TO MATURITY
Debt securities for which the Company has the positive intent and ability to
hold to maturity are reported at cost, adjusted for amortization of premiums and
accretion of discounts, which are recognized in interest income over the period
to maturity.
Declines in the fair value of individual securities held to maturity and
available for sale below their cost that are other than temporary result in
writedowns of the individual securities to their fair value. Such writedowns are
included in earnings as realized losses. Loans Held for Sale
LOANS HELD FOR SALE
Mortgage and government guaranteed loans originated for sale in the
secondary market are carried at the lower of cost or estimated market value. Net
unrealized losses are recognized through a valuation allowance established by
charges to income.
LOANS
Loans are stated at the amount of unpaid principal, reduced by an allowance
for credit losses. Interest on loans is accrued daily based on the principal
amount outstanding. The accrual of interest on loans is discontinued when, in
management's opinion, the borrower may be unable to meet payments as they become
due. When interest accrual is discontinued, all unpaid accrued interest is
reversed against current income. If management determines that the ultimate
collectibility of principal is in doubt, cash receipts on nonaccrual loans are
applied to reduce the principal income.
The Bank's policy is to defer loan origination and commitment fees and
certain direct loan origination costs and amortize the net amount as an
adjustment of the yield of the related loan.
ALLOWANCE FOR CREDIT LOSSES
The allowance for credit losses is increased by provisions charged to
operations and reduced by loans charged off, net of recoveries. The allowance is
based on management's periodic evaluation of potential losses in the loan
portfolio after consideration of historical loss experience, adverse situations
that may affect the borrowers' ability to repay, the estimated value of any
underlying collateral, economic conditions, the results of examination of
individual loans, the evaluation of the overall portfolio by senior credit
personnel and federal and state regulatory agencies, and other risks inherent in
the portfolio.
When management determines that it is possible that a borrower will be
unable to repay all amounts due according to the terms of the loan agreement,
including scheduled interest payments, the loan is considered impaired. The
amount of impairment is measured based on the present value of expected future
cash flows discounted at the loan's effective interest rate, or when the primary
source of repayment is provided by real estate collateral, at the fair value of
the collateral less estimated selling costs. The amount of impairment and any
subsequent charges are recorded through the provision for credit losses as an
adjustment to the allowance for credit losses.
F-7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FIRST COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARIES
DECEMBER 31, 1996 AND 1995
Note 1--Summary of Significant Accounting Policies (continued)
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated depreciation,
which is computed on a straight-line method over the estimated useful lives
of the assets. Leasehold improvements are amortized over the term of the
lease or the estimated useful life of the improvement, whichever is less.
Gains or losses on dispositions are reflected in earnings.
FORECLOSED REAL ESTATE
Real estate properties acquired through, or in lieu of, foreclosure are
to be sold and are initially recorded at the fair value of the properties
less estimated costs of disposal. Any write-down to fair value at the time of
transfer to foreclosed real estate owned is charged to the allowance for
credit losses. Properties are evaluated regularly to ensure that the recorded
amounts are supported by their current fair values, and that valuation
allowances to reduce the carrying amounts to fair value less estimated costs
to dispose are recorded as necessary. Additions to or reductions from
valuation allowances are recorded in income.
INCOME TAXES
Deferred tax assets and liabilities are reflected at currently enacted
income tax rates applicable to the period in which the deferred tax assets or
liabilities are expected to be realized or settled. As changes in tax laws or
rates are enacted, deferred tax assets and liabilities are adjusted through
the provision for income taxes.
Subsidiaries provide for tax on a separate company basis and remit to the
Company amounts currently due.
FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in
estimating fair values of financial instruments as disclosed in the financial
statements:
CASH AND SHORT-TERM INSTRUMENTS
The carrying amounts of cash and short-term instruments approximate
their fair value.
SECURITIES AVAILABLE FOR SALE AND HELD TO MATURITY
Fair values for securities, excluding restricted equity securities, are
based on quoted market prices. The carrying values of restricted equity
securities approximate fair values.
LOANS
For variable rate loans that reprice frequently and have no significant
change in credit risk, fair values are based on carrying values. Fair
values for fixed rate loans are estimated using discounted cash flow
analyses, using interest rates currently being offered for loans with
similar terms to borrowers of similar credit quality. Fair values of
loans held for sale are based on their estimated market prices. Fair
values for impaired loans are estimated using discounted cash flow
analyses or underlying collateral values, where applicable.
(continued)
F-8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FIRST COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARIES
DECEMBER 31, 1996 AND 1995
NOTE 1--Summary of Significant Accounting Policies (Continued)
DEPOSIT LIABILITIES
The fair values disclosed for demand deposits are, by definition, equal
to the amount payable on demand at the reporting date (that is, their
carrying amounts). The carrying amounts of variable rate, fixed term
money market accounts and certificates of deposit approximate their
fair values at the reporting date. Fair values for fixed rate
certificates of deposit are estimated using a discounted cash flow
calculation based on interest rates currently being offered on similar
certificates.
SHORT-TERM BORROWINGS
The carrying amounts of federal funds purchased and other short-term
borrowings maturing within 90 days approximate their fair values. Fair
values of other short-term borrowings are estimated using discounted
cash flow analyses based on the Company's current incremental borrowing
rates for similar types of borrowing arrangements.
LONG-TERM DEBT
The fair values of the Company's long-term debt are estimated using
discounted cash flow analyses based on the Company's current
incremental borrowing rates for similar types of borrowing arrangements.
CASH AND CASH EQUIVALENTS
The Company considers all cash and due from depository institutions to be
cash equivalents. The Company maintains cash in depository institution
accounts which, at times, may exceed Federally insured limits. The Company
has not experienced any losses in such accounts.
EARNINGS PER COMMON SHARE
Earnings per common and equivalent share is calculated by dividing net
income by the weighted average number of common shares and common share
equivalents outstanding during the years presented. Fully diluted earnings
per share assumes that all dilutive stock options outstanding are issued such
that their dilutive effect is maximized.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1996, the Financial Accounting Standards Board issued Statement
No. 125, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments (SFAS No. 125), which establishes accounting and reporting
standards based on consistent application of a financial components approach
that focuses on control. Under this approach, after a transfer of financial
assets, an entity recognizes the financial and servicing assets it controls
and the liabilities it has incurred, derecognizes financial assets when
control has been surrendered, and derecognizes liabilities when satisfied.
The Statement also provides consistent standards for distinguishing transfers
of financial assets that are sales from transfers that are secured
borrowings. Most provisions of the Statement is effective for the year
beginning after December 15, 1996 and may not be applied retroactively.
Certain other provisions of this Statement were deferred until years
beginning after December 31, 1997 by SFAS No. 127, Deferral of the Effective
Date of Certain Provisions of FASB No. 125, which was issued by the Financial
Accounting Standards Board in December 1996. The Bank has not assessed the
impact of SFAS No. 125 on its future operations.
F-9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FIRST COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARIES
DECEMBER 31, 1996 AND 1995
NOTE 2--ACCOUNTING CHANGES
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS
No. 123). Under SFAS No. 123, stock-based compensation is measured either
using the intrinsic value method as prescribed by Accounting Principles Board
Opinion No. 25 Accounting for Stock Issued to Employees (APB No. 25)or the
fair value method described in SFAS No. 123. Companies choosing the intrinsic
value method are required to disclose the pro forma impact of the fair value
method on net income and earnings per share. The Company implemented SFAS No.
123 using the intrinsic value method, which had no effect on its financial
position or results of operations. Required pro forma disclosures are
included in Note 14.
NOTE 3--RESTRICTED ASSETS
Federal Reserve Board regulations require that, based on the composition
of the Bank's deposits, the Bank maintain certain minimum reserves in the
form of cash on hand or balances on deposit with the Federal Reserve Bank.
The average amounts of such balances for the year ended December 31, 1996 and
1995 were approximately $970,000 and $1,150,000, respectively.
NOTE 4--DEBT AND EQUITY SECURITIES
Debt and equity securities have been classified according to management's
intent. The carrying amount of securities and the approximate fair values at
December 31 were as follows (dollars in thousands):
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- --------------- ------------- -----------
<S> <C> <C> <C> <C>
Available-for-Sale Securities
December 31, 1996
U.S. Government and agency securities............................. $ 3,557 $ 6 $ 27 $ 3,536
Equity securities................................................. 2,053 -- -- 2,053
Corporate securities.............................................. 855 -- 1 854
Mortgage backed securities........................................ 745 -- 11 734
State and municipal securities.................................... 323 13 -- 336
$ 7,533 $ 19 $ 39 $ 7,513
Available-for-Sale Securities
December 31, 1995
U.S. Government and agency securities............................. $ 3,753 $ 4 $ 18 $ 3,739
Equity securities................................................. 1,821 -- -- 1,821
Corporate securities.............................................. 297 1 -- 298
Mortgage backed securities........................................ 1,012 -- 58 954
State and municipal securities.................................... 324 7 -- 331
$ 7,207 $ 12 $ 76 $ 7,143
</TABLE>
(continued)
F-10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FIRST COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARIES (Continued)
DECEMBER 31, 1996 AND 1995
Note 4--Debt and Equity Securities (continued)
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------ ------------- ----------- -----------
<S> <C> <C> <C> <C>
Held-to-Maturity Securities
December 31, 1996
U.S. Government and agency securities.......................... $ 1,251 $ 4 $ -- $ 1,255
Corporate securities........................................... 251 -- -- 251
State and municipal securities................................. 1,680 69 6 1,743
$ 3,182 $ 73 $ 6 $ 3,249
December 31, 1995
U.S. Government and agency securities.......................... $ 4,214 $ 6 $ -- $ 4,220
Corporate securities........................................... 822 21 -- 843
State and municipal securities................................. 2,226 56 -- 2,282
$ 7,262 $ 83 $ -- $ 7,345
</TABLE>
The scheduled maturities of held-to-maturity and available-for-sale debt
securities at December 31, 1996 were as follows (dollars in thousands):
<TABLE>
<CAPTION>
HELD-TO-MATURITY SECURITIES AVAILABLE-FOR-SALE SECURITIES
----------------------------------- -------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ESTIMATED ESTIMATED
WEIGHTED WEIGHTED
AMORTIZED FAIR AVERAGE AMORTIZED FAIR AVERAGE
COST VALUE YIELD COST VALUE YIELD
----------- --------- ----------- ----------- --------- -------------
Due in one year or less................................. $ 1,937 $ 1,953 5.65% $ 1,511 $ 1,498 5.09%
Due after one year through five years................... 692 712 5.93% 3,969 3,962 5.83%
Due after five years through ten years.................. 553 584 5.91% -- -- --
$ 3,182 $ 3,249 $ 5,480 $ 5,460
</TABLE>
The carrying amount and approximate market value of debt securities at
December 31, 1996 by contractual maturity are shown above. Expected maturities
may differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.
Securities with a carrying value of $1,553,000 and $2,059,000 at December
31, 1996 and 1995, respectively, were pledged to secure public deposits and
certain short-term borrowings, and for other purposes as required by law.
F-11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FIRST COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARIES
DECEMBER 31, 1996 AND 1995
NOTE 5--LOANS
The composition of loans at December 31 was (dollars in thousands):
<TABLE>
<CAPTION>
1996 % OF 1995 % OF
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Commercial..................................... $ 27,353 20.94% $ 28,259 22.40%
Real estate construction....................... 14,071 10.77% 15,701 12.45%
Real estate mortgage:
1-4 Family................................... 21,381 16.37% 20,678 16.39%
Commercial................................... 61,861 47.35% 54,450 43.16%
Consumer....................................... 5,966 4.57% 7,066 5.60%
$130,632 100.00% $126,154 100.00%
</TABLE>
Transactions in the allowance for credit losses for the years ended
December 31, were as follows (dollars in thousands):
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Balance at beginning of year............................................... $ 1,376 $ 1,250
Provision charged to operations............................................ 261 236
Losses charged to allowance................................................ (227) (176)
Recoveries credited to allowance........................................... 10 66
Net charge-offs.......................................................... (217) (110)
Balance at end of year................................................... $ 1,420 $ 1,376
Ratio of net charge-offs to Average Loans Outstanding...................... .17% .09%
</TABLE>
The recorded investment in impaired loans was $1,898,000 and $1,427,000 at
December 31, 1996 and 1995, respectively. Specific allocations of $132,000 at
December 31, 1996 and $164,000 at December 31, 1995 of the allowance for
credit losses were made for $1,493,000 and $814,000, respectively, of these
impaired loans. For the remaining impaired loans, no allocation of the
allowance for credit losses was considered necessary. The average recorded
investment in impaired loans during the years ended December 31, 1996 and
1995 was $1,017,000 and $1,541,000, respectively. No interest income was
recognized or collected in cash during 1996.
At December 31, 1996, there were no commitments to lend additional funds to
borrowers whose loans were impaired. Loans over 90 days past due still
accruing interest were $1,238,000 and $401,000 at December 31, 1996
and 1995, respectively.
(continued)
F-12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FIRST COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARIES
DECEMBER 31, 1996 AND 1995
Note 5--Loans (concluded)
Maturity and repricing information for the Company's loan portfolio at
December 31, 1996 is as follows:
<TABLE>
<CAPTION>
FIXED RATE FLOATING RATE
MATURING IN REPRICING IN TOTAL
------------- ----------------- ---------
<S> <C> <C> <C>
0-90 days $ 10,285 $ 29,300 $ 39,585
91--365 days 21,37 2,190 23,563
1 year--5 years 52,093 7,047 59,140
5 years and greater 5,840 606 6,446
$ 89,591 $ 39,143 128,734
Loans on which the accrual of
interest has been discontinued 1,898
$ 130,632
</TABLE>
At December 31, 1996 and 1995, certain officers and directors, and companies
in which they have 10% or more beneficial interest, were indebted to the Bank
in the aggregate amount of $6,177,000 and $4,972,000, respectively. All such
loans were made in the ordinary course of business. During 1996 $3,510,000 of
new loans were made, and repayments totaled $2,305,000. During 1995,
$6,415,000 of new loans were made, and repayments totaled $4,338,000.
NOTE 6--PREMISES AND EQUIPMENT
Premises and equipment at December 31 were (dollars in thousands):
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Land................................................. $ 1,190 $ 1,010
Bank premises........................................ 5,972 6,052
Equipment, furniture and fixtures.................... 4,675 4,194
Total cost........................................... 11,837 11,256
Accumulated depreciation 4,244....................... 3,416
$ 7,593 $ 7,840
</TABLE>
At December 31, 1996, the Company had various noncancellable lease agreements
for office space and branch facilities requiring the following minimum
payments for the years ending December 31: 1997-- $73,000; 1998 -$53,000;
1999--$38,000; 2000--$38,000; 2001--$38,000 and thereafter--$94,000. The
leases contain renewal options for between one and four additional terms of
between five and ten years each. Because of possible future lease renewals,
these payments are not necessarily a forecast of future rental expense.
Total rental expense was $74,000 in 1996 and $113,000 in 1995.
F-13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FIRST COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARIES
DECEMBER 31, 1996 AND 1995
NOTE 7--INTEREST BEARING DEPOSITS
The aggregate amount of short-term jumbo certificates of deposit, each with a
minimum denomination of $100,000, was approximately $15,035,000 and
$15,198,000 at December 31, 1996 and 1995, respectively. At December 31, 1996
scheduled maturities of certificates of deposit are as follows (dollars in
thousands):
<TABLE>
<S> <C>
1997 $ 61,811
1998 6,407
1999 865
2000 759
2001 69
2002 28
Total................ $ 69,939
</TABLE>
NOTE 8--LONG-TERM DEBT
Long-term debt at December 31 is as follows (dollars in thousands):
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Note payable to a director of the Company due
in monthly installments of $8,000, including
interest at 0.75% over the prime rate (9.0%
at December 31, 1996), collateralized by
equipment. Interest paid in 1996 and 1995
totaled $22,000 and $32,000 respectively. $ 210 $ 291
Note payable due in monthly installments of
$6,000 including interest at 2.5% over the 5
year constant maturity Treasury index,
adjusted every 5 years (9.375% at December
31, 1996), collateralized by premises. 739 746
Note payable due in annual installments of
$100,000, including interest at 6%,
collateralized by premises. 100 200
Note payable on behalf of the Company's KSOP
due in monthly principal installments of
$5,000, plus interest at 0.50% over prime
(8.75% at December 31, 1996), collateralized
by 14,000 shares of Company stock; guaranteed
by the Company and the Bank. 245 --
$ 1,294 $ 1,237
</TABLE>
Principal reductions due on the above indebtedness for the years ending
December 31 are as follows: 1997 -$257,000; 1998--$166,000; 1999--$97,000;
2000--$97,000; 2001--$17,000; and thereafter--$660,000.
F-14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FIRST COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARIES
DECEMBER 31, 1996 AND 1995
NOTE 9--INCOME TAXES
The Company and its subsidiaries file a consolidated federal income tax
return.
Income taxes are comprised of the following for the years ended December 31
(in thousands):
<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C> <C>
Current............................................... $ 702 $ 262
Deferred.............................................. 16 62
Total income taxes.................................... $ 718 $ 324
</TABLE>
Deferred income taxes result from temporary differences in the recognition of
income and expense which are reported in different periods for financial
reporting and income tax purposes. The sources of the differences and the
resulting deferred income tax provision are as follows (dollars in thousands):
<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C> <C>
Provision for credit losses........................... ($ 106) ($ 54)
Depreciation.......................................... (17) (10)
Deferred income....................................... 180 (96)
Low income housing tax credits........................ 77 (275)
Increase (decrease) in valuation reserve.............. (77) 507
Other................................................. (41) (10)
Deferred income taxes................................. $ 16 $ 62
</TABLE>
A reconciliation of the Company's effective income tax rate with the Federal
statutory tax rate for the years ended December 31, follows (dollars in
thousands):
<TABLE>
<CAPTION>
1996 1995
--------------- --------------
<S> <C> <C> <C> <C>
AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ -------
Income tax based on statutory rate........ $ 877 34.0% $ 423 34.0%
Adjustments resulting from:
Tax-exempt income....................... (42) (1.6) (52) (4.2)
Tax credits............................. (77) (3.0) (107) (8.6)
Other................................... (40) (1.6) 60 4.8
Income taxes............................ $ 718 27.8% $ 324 26.0%
</TABLE>
(continued)
F-15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FIRST COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARIES
DECEMBER 31, 1996 AND 1995
Note 9--Income Taxes (concluded)
Net deferred tax assets (liabilities) consist of the following components at
December 31 (in thousands):
<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C> <C>
Deferred Tax Assets
Allowance for credit losses, in excess of
tax reserves............................. $ 417 $ 311
Deferred compensation...................... 147 93
Low income housing tax credits............. 930 1,007
Valuation reserve.......................... (930) (1,007)
Unrealized depreciation on
available-for-sale securities............ 7 22
Other deferred tax assets.................. 23 23
Total deferred tax assets.................. 594 449
Deferred Tax Liabilities
Tax depreciation taken in excess of
book depreciation........................ 199 412
Deferred income............................ 216 592
Other deferred tax liabilities............. 47 34
Total deferred tax liabilities............. 838 662
Net deferred tax liabilities................. $ 244 $ 213
</TABLE>
NOTE 10--COMMITMENTS AND CONTINGENT LIABILITIES
FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Bank is party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing needs of its customers. The
financial instruments include commitments to extend credit and standby
letters of credit. These instruments involve, to varying degrees, elements of
credit risk in excess of the amount recognized in the balance sheets.
F-16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FIRST COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARIES
DECEMBER 31, 1996 AND 1995
Note 10--Commitments and Contingent Liabilities (continued)
FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Bank's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit is represented by the contractual amount of those
instruments. The Bank uses the same credit policies in making commitments and
conditional obligations as it does for on-balance-sheet instruments. A
summary of the Bank's commitments is as follows (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
<S> <C> <C>
1996 1995
--------- ---------
Commitments to extend credit:
Real estate secured.............................. $ 11,401 $ 7,369
Credit card lines................................ 2,543 2,102
Other............................................ 18,977 8,489
Total commitments to extended credit............... $ 32,921 $ 17,960
Standby letters of credit.......................... $ 487 $ 452
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Since
many of the commitments are expected to expire without being drawn upon, the
total commitment amounts do not necessarily represent future cash
requirements. The Bank's experience has been that approximately 70% of loan
commitments are drawn upon by customers. The Bank evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained,
if deemed necessary by the Bank upon extension of credit, is based on
management's credit evaluation of the party. Collateral held varies, but may
include accounts receivable, inventory, property and equipment, residential
real estate, and income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. Those guarantees
are primarily issued to support public and private borrowing arrangements.
The credit risk involved in issuing letters of credit is essentially the same
as that involved in extending loan facilities to customers. Collateral held
varies as specified above, and is required in instances where the Bank deems
necessary.
The Bank has agreements with commercial banks for various short-term credit
facilities totaling $3,300,000, none of which were used during 1996 or 1995.
The Bank also has a credit line with the Federal Home Loan Bank which allows
it to borrow up to 10% of the Bank's assets (approximately $17 million at
December 31, 1996). Borrowings under the Federal Home Loan Bank borrowing
line in 1996 or 1995 were repaid within days of the respective advances, and
average balances outstanding related to these borrowings were nominal.
(continued)
F-17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FIRST COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARIES
DECEMBER 31, 1996 AND 1995
Note 10--Commitments and Contingent Liabilities (concluded)
CONTINGENCIES
Because of the nature of its activities, the Company is subject to various
pending and threatened legal actions which arise in the ordinary course of
business. In the opinion of management, liabilities arising from these
claims, if any, will not have a material effect on the financial position of
the Company.
The Company has entered into contracts with certain of its executives and
others which provide for contingent payments subject to future events.
NOTE 11--CONCENTRATION OF CREDIT RISK
The Bank has credit risk exposure including off-balance-sheet credit risk
exposure related to real estate loans as disclosed in Notes 5 and 11. The
ultimate collectibility of a substantial portion of the loan portfolio is
susceptible to changes in economic and market conditions in the region. The
bank generally requires collateral on all real estate exposures and typically
maintains loan-to-value ratios of no greater than 80%.
Investments in state and municipal securities generally involve governmental
entities within Washington State. Standby letters of credit were granted
primarily to commercial borrowers. The Bank, as a matter of practice,
generally does not extend credit to any single borrower or group of related
borrowers in excess of $3,000,000.
The contractual amounts of credit-related financial instruments such as
commitments to extend credit, credit-card arrangements, and letters of credit
represent the amounts of potential accounting loss should the contract be
fully drawn upon, the customer default, and the value of any existing
collateral become worthless.
NOTE 12--BENEFIT PLANS
EMPLOYEE STOCK OWNERSHIP PLAN
The Company has a combined employee stock ownership and profit sharing plan
with 401(k) provisions (KSOP) which covers substantially all employees who
have completed at least one year of service.
During 1996, the Company leveraged the KSOP (Note 8). Proceeds from the note
were used to purchase 20,000 shares of Company stock, which were initially
pledged as collateral on the note. As the debt is repaid, shares are released
from collateral and allocated to active employees, based on the proportion of
debt service paid during the year.
The Company accounts for the KSOP in accordance with Statement of Position
93-6 of the American Institute of Certified Public Accountants. Accordingly,
the balance of the debt of the KSOP is included in long-term debt on the
accompanying balance sheet with a corresponding deduction from stockholders'
equity. As shares are released from collateral, the Company reports
compensation expense equal to the current market price of the shares, and the
shares become outstanding for earnings-per-share computations.
(continued)
F-18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FIRST COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARIES
DECEMBER 31, 1996 AND 1995
Note 12--Benefit Plans (continued)
Eligible employees may defer up to 12% of their annual compensation in a
pre-tax basis subject to certain IRS limits. The Company contributes to the
Plan one-half the employees' contributions up to 3% of the employees'
compensation. Profit sharing contributions to the Plan may also be made at
the discretion of the Board of Directors. The Company also makes
contributions equal to the amount required to service the Plan' s debt under
the terms of the KSOP note. Company contributions to this plan totaled
$168,000 and $165,000 in 1996 and 1995, respectively.
The KSOP shares as of December 31 were as follows:
<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C> <C>
Allocated shares...................................... $ 70,303 $ 63,742
Unreleased shares..................................... 14,000 --
Total KSOP shares..................................... 84,303 63,742
Fair value of unreleased shares....................... $ 308,000 N/A
</TABLE>
When a participant terminates from the Plan, the participant may choose to
have his account distributed in either cash or Company stock. Certain
participants may also be eligible to diversify a certain percentage of their
accounts. A distribution of stock in the event of termination or
diversification requires the Company to issue put options to the participant.
This permits the participant to sell the stock to the Company at fair value
at any time during the option periods, which can be as long as 18 months. At
December 31, 1996 and 1995, outstanding put options were not material.
401(k)/Profit Sharing Plan
During 1995, contributions to the 401K plan of Northwest Community Bank,
totaled $58,000 prior to its acquisition by the Company in November 1995. The
plan was discontinued upon the Company's acquisition of Northwest Community
Bank.
INCENTIVE COMPENSATION PLAN
Incentive compensation is awarded to officers and qualified employees based
on the financial performance of the Company. Awards are payable if the
Company and its subsidiaries meet earnings and other performance objectives
and are determined as a percentage of their base salary. Fees paid to
directors are also adjusted annually based on the financial performance of
the Company. Awards under the plan for 1996 totaled $111,000. No awards were
made under the plan in 1995.
Northwest Community Bank maintained an incentive compensation plan for
certain officers. Awards under this plan totaled $300,000 in 1995 prior to
its acquisition by the Company.
EXECUTIVE SUPPLEMENTAL INCOME PLAN
The Company provides an Employee Supplemental Income (ESI) plan covering a
select group of management personnel. The post-retirement benefit provided by
the ESI plan is designed to supplement a participating officer's retirement
benefits from social security, in order to provide the officer with a certain
percentage of final average income at retirement age. Expenses related to
this plan totaled $54,000 and $70,000 in 1996 and 1995, respectively.
(continued)
F-19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FIRST COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARIES
DECEMBER 31, 1996 AND 1995
Note 12--Benefit Plans (concluded)
Benefits to employees may be funded by life insurance policies purchased by
the Company, which had cash surrender values of $1,961,000 and $1,545,000 at
December 31, 1996 and 1995, respectively. Liabilities to employees, which are
being accrued over their expected time to retirement, were $113,000 and
$64,000 at December 31, 1996 and 1995, respectively.
DIRECTOR DEFERRED INCOME PLAN
In 1992, the Board of Directors approved a plan similar to the ESI plan under
which a director may elect to defer director fees until retirement and to
provide a death benefit.
Benefits to directors may be funded by life insurance policies purchased by
the Company, which had cash surrender values of $127,000 and $105,000 at
December 31, 1996 and 1995, respectively. Accrued liabilities to directors at
December 31, 1996 and 1995 totaled $122,000 and $70,000, respectively.
Expenses associated with this plan were $58,000 and $22,000 in 1996 and 1995,
respectively.
NOTE 13--STOCK DIVIDENDS
In 1996 the Board of Directors declared a 5% stock dividend to shareholders
of record as of March, 20, 1996. The effect of the dividend was to increase
the number of shares outstanding by 80,226. In 1995 the Board of Directors
declared a 5% stock dividend to shareholders of record on February 28, 1995.
The effect of the dividend was to increase the number of shares outstanding
by 49,234. Accordingly, all references to number of common shares and per
share data in these financial statements have been restated to reflect the
stock dividends.
NOTE 14--STOCK OPTION PLANS
The Company maintains stock option plans for non-employee members of the
Board of Directors and incentive stock option plans for key employees. The
exercise price of the stock options under the plans may not be less than the
fair market value of the stock at the date of grant.
The Bank applies APB Opinion No. 25 and related interpretations in accounting
for these plans; accordingly, no compensation cost has been recognized. Had
compensation cost for the Company's stock option plans been determined based
on the fair value at the grant dates for awards granted in 1996 under these
plans, consistent with the method prescribed by SFAS No. 123 (see Note 2),
the Company's net income and earnings per share would have been reduced to
these pro forma amounts:
<TABLE>
<CAPTION>
<S> <C>
Net income (dollars in thousands):
As reported................................................... $ 1,861
Pro forma..................................................... 1,587
Earnings per share:
As reported................................................... $ 1.03
Pro forma..................................................... 0.90
Earnings per share, assuming full dilution:
As reported................................................... $ 1.01
Pro forma..................................................... .88
</TABLE>
(continued)
F-20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FIRST COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARIES
DECEMBER 31, 1996 AND 1995
Note 14--Stock Option Plans (continued)
The fair value of each option grant is estimated on the date of grant, based
on the Black-Scholes option-pricing model and using the following
weighted-average assumptions: no dividend yield; risk-free interest rate of
6.50%; and expected lives of 10 years for the options.
Options granted during 1996 are 20% vested on each of the five subsequent
anniversaries of the grant date. Vesting for 60,000 of these options is
contingent upon "high performance" of the Bank as determined by the Company's
executive committee.
Stock option and per shares amounts for current and prior periods have been
adjusted to reflect the effect of stock dividends, and are as follows:
<TABLE>
<CAPTION>
EMPLOYEE DIRECTOR TOTAL WEIGHTED AVERAGE
OPTIONS OPTIONS OPTIONS EXERCISE PRICE
-------- -------- ------- ----------------
<S> <C> <C> <C> <C>
Under option at
December 31, 1994........... 263,456 110,744 374,200 $ 11.45
Exercised................. (6,975) (15,664) (22,639) 9.34
Expired................... (11,007) (15,565) (26,572) 12.69
Under option at
December 31, 1995........... 245,474 79,515 324,989 11.48
Granted................... 100,000 -- 100,000 20.00
Exercised................. (5,873) -- (5,873) .83
Forfeited..................... (42,720) (5,292) (48,012) 13.49
Under option at
December 31, 1996........... 296,881 74,223 371,104 $ 13.58
Options exercisable at
December 31, 1996........... 133,695 55,171 188,866
Pro forma per share
compensation cost of options
granted during 1996......... $ 9.45
</TABLE>
Options becoming exercisable under both stock option plans in future years
ending December 31 are as follows: 1997--58,375; 1998--49,746; 1999--49,745;
2000--23,000; 2001--8,000. Options for 37,733 shares remain available to be
granted at December 31, 1996.
(continued)
F-21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FIRST COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARIES
DECEMBER 31, 1996 AND 1995
Note 14--Stock Option Plans (concluded)
The following information summarizes stock options outstanding at December
31, 1996:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
<S> <C> <C> <C> <C> <C>
Under $6 $ 66,044 5 $ 4.84 66,044 $ 4.84
$6-$8 19,487 5 6.89 14,990 7.11
$9-$11 59,337 6 10.78 57,337 10.78
$15-$20 226,236 8 17.44 50,495 15.42
371,104 188,866
</TABLE>
NOTE 15--CONDENSED FINANCIAL INFORMATION--PARENT COMPANY ONLY
Condensed Balance Sheets--December 31 (dollars in thousands)
<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C> <C>
Assets
Cash............................................... $ 443 $ 461
Investment in subsidiaries......................... 18,052 16,110
Buildings and equipment............................ 17 28
Due from subsidiaries.............................. 2,477 2,477
Other assets....................................... 232 182
Total assets....................................... $ 21,221 $ 19,258
Liabilities and Stockholders' Equity
Liabilities.......................................... $ 302 $ 18
Stockholders' Equity................................. 20,919 19,240
Total liabilities and stockholders' equity......... $ 21,221 $ 19,258
</TABLE>
(continued)
F-22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FIRST COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARIES
DECEMBER 31, 1996 AND 1995
Note 15--Condensed Financial Information--Parent Company Only (continued)
Condensed Statements of Income--Years Ended December 31 (dollars in
thousands)
<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C> <C>
Operating Income
Dividends received from subsidiaries............... $ -- $ 69
Rental and other income............................ 22 61
Total operating income............................. 22 130
Operating Expenses................................. 100 277
Loss before income taxes and equity in undistributed
income of subsidiaries............................. (78) (147)
Income Tax Benefit................................... (27) (76)
Loss before equity in undistributed income of
subsidiaries....................................... (51) (71)
Equity in Undistributed Income of Subsidiaries....... 1,912 991
Net income........................................... $ 1,861 $ 920
</TABLE>
(continued)
F-23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FIRST COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARIES
DECEMBER 31, 1996 AND 1995
Note 15--Condensed Financial Information--Parent Company Only (concluded)
Condensed Statements of Cash Flows--Years Ended December 31 (dollars in
thousands)
<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C> <C>
Cash Flows from Operating Activities
Net income......................................... $ 1,861 $ 920
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed income
of subsidiaries.............................. (1,912) 91)
Increase in due from subsidiaries.............. -- (1,723)
Depreciation................................... 6 19
Other--net..................................... (8) (64)
Net cash used by operating activities.............. (53) (1,839)
Cash Flows from Investing Activities
Investment in subsidiaries......................... -- (66)
Cash Flows from Financing Activities
Proceeds from sales of common stock................ 45 281
Payment for fractional shares...................... (11) (4)
Net cash provided by financing activities 35....... 276
Net decrease in cash............................. (18) (1,629)
Cash
Beginning of year.................................. 461 2,090
End of year........................................ $ 443 $ 461
Supplemental Schedule of Non-Cash Investing
Activities Contribution of investment in Premises,
Inc. to the Bank................................... $ 1,480 $ --
Stock issued in acquisition of Northwest
Community Bank..................................... -- 1,377
Change in depreciation of available for sale
securities, net.................................... 29 58
Net increase in guaranteed KSOP obligation........... 245 --
Equipment transferred to Bank........................ -- 4
</TABLE>
F-24
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FIRST COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARIES
DECEMBER 31, 1996 AND 1995
NOTE 16--REGULATORY MATTERS
The Company and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory--and possibly
additional discretionary--actions by regulators that, if undertaken, could
have a direct material effect on the Company's financial statements. Under
capital adequacy guidelines on the regulatory framework for prompt corrective
action, the Bank must meet specific capital adequacy guidelines that involve
quantitative measures of the Bank's assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices.
The Company's and the Bank's capital classification is also subject to
qualitative judgments by the regulators about components, risk weightings,
and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios (set
forth in the table below) of Tier 1 capital (as defined in the regulations)
to total average assets (as defined), and minimum ratios of Tier 1 and total
capital (as defined) to risk-weighted assets (as defined). Under the
regulatory framework for prompt corrective action, the Bank must maintain
minimum Tier 1 leverage, Tier 1 risk-based, and total risk-based ratios as
set forth in the table.
As of December 31, 1996, the Bank was categorized as well capitalized under
the regulatory framework for prompt corrective action. To be categorized as
well capitalized, the Bank must maintain minimum total risk-based, Tier 1
risk-based, Tier 1 leverage ratios as set forth in the table. There are no
conditions or events since that notification that management believes have
changed the institution's category.
The actual capital amounts and ratios are as follows (dollars in thousands):
<TABLE>
<CAPTION>
TO BE WELL CAPITALIZED
UNDER PROMPT
CAPITAL ADEQUACY CORRECTIVE ACTION
ACTUAL PURPOSES PROVISIONS
-------------- ----------------- ----------------------
<S> <C> <C> <C> <C> <C> <C>
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ------ -----
December 31, 1996
Tier 1 capital (to average assets)
Consolidated...... $ 21,177 1.96% $ 7,079 4.00% N/A N/A
FCB............... 17,941 10.41% 6,892 4.00% 8,615 5.00%
Tier 1 capital (to risk-weighted assets)
Consolidated...... 21,177 14.78% 5,730 4.00% N/A N/A
FCB............... 17,941 12.14% 5,911 4.00% 8,866 8.00%
Total capital
(to risk-weighted assets)
Consolidated...... 22,597 15.77% 11,461 8.00% N/A N/A
FCB............... 19,361 13.10% 11,822 8.00% 14,777 10.00%
December 31, 1995
Tier 1 capital (to average assets)
Consolidated...... $ 19,271 10.98% $ 6,927 4.00% N/A N/A
FCB............... 14,799 8.43% 7,023 4.00% 8,779 5.00%
Tier 1 capital (to risk-weighted assets)
Consolidated...... 19,271 14.42% 5,345 4.00% N/A N/A
FCB............... 14,799 11.60% 5,102 4.00% 7,654 6.00%
Total capital (to risk-weighted assets)
Consolidated...... 20,658 15.46% 10,690 8.00% N/A N/A
FCB............... 16,175 12.68% 10,204 8.00% 12,756 10.00%
</TABLE>
(continued)
F-25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FIRST COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARIES
DECEMBER 31, 1996 AND 1995
Note 16--Regulatory Matters (concluded)
Management believes, as of December 31, 1996, that the Company and the Bank
meet all capital requirements to which they are subject.
RESTRICTIONS ON RETAINED EARNINGS
The Bank is subject to certain restrictions on the amount of dividends that
it may declare without prior regulatory approval. At December 31, 1996, all
of the Bank's retained earnings were available for dividend declaration to
its parent company without prior regulatory approval. Subsequent to year end,
in conjunction with the acquisition of Prairie Security Bank (Note 19), the
Bank's board of directors approved payment of a dividend ranging from $3
million to $3.3 million dividend to be paid to the Company.
NOTE 17--FAIR VALUES OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments at December
31, 1996 were as follows (dollars in thousands):
<TABLE>
<CAPTION>
CARRYING FAIR
AMOUNT VALUE
---------- ---------
<S> <C> <C>
Financial Assets
Cash and due from banks, interest bearing deposits
with banks, and federal funds sold............... $ 22,608 $ 22,608
Securities available for sale...................... 7,513 7,513
Securities held to maturity........................ 3,182 3,249
Loans held for sale................................ 726 726
Loans receivable, net.............................. 129,212 128,800
Financial Liabilities
Deposits........................................... $ 153,434 $ 153,600
Long-term debt..................................... 1,294 1,289
</TABLE>
NOTE 18--OTHER OPERATING EXPENSES
Other operating expenses include the following amounts which are in excess of
1% of the total of interest income and non-interest income for the years
ended December 31 (dollars in thousands):
<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C> <C>
Data processing....................................... $ 86 $ 204
Office supplies and expense........................... 208 188
State taxes........................................... 247 244
Advertising........................................... 172 98
</TABLE>
F-26
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FIRST COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARIES
DECEMBER 31, 1996 AND 1995
NOTE 19--SUBSEQUENT EVENTS
PRAIRIE SECURITY BANK ACQUISITION
On February 7, 1997, the Company completed the acquisition of Prairie
Security Bank (PSB) in a business combination accounted for as a purchase.
PSB is a state chartered bank headquartered in Yelm, Washingon with three
branches and approximately $45,000,000 in total assets. The purchase price of
$9,892,000 in cash and Company stock, exceeded the fair value of the net
assets of PSB by $4,917,000, which will be amortized on the straight line
basis over 25 years. The results of operations of PSB will be included with
the results of operations of the Company from February 7, 1997. Assuming the
acquisition had occurred on January 1, 1996, the Company's results of
operations would have been as follows for the year ended December 31, 1996
(dollars in thousands):
<TABLE>
<S> <C>
Interest income............................................. $ 19,410
Interest expense............................................ 7,287
Net interest income......................................... 12,123
Net income.................................................. 2,033
Earnings per common share and common equivalent share....... .94
Earnings per common share, assuming full dilution........... .93
</TABLE>
TARGETED STOCK REPURCHASE
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. In the Stock Purchase Agreement
the Company has also agreed to repurchase 66,042 stock options for $1,453,000
on or before January 31, 1998.
BRANCH ACQUISITION
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.
F-27
<PAGE>
PROXY
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS.
PROXY 1997 ANNUAL MEETING--MAY 7, 1997
THE UNDERSIGNED HEREBY AUTHORIZES THE VOTE, AS DESIGNATED BELOW, OF ALL THE
SHARES OF COMMON STOCK OF FIRST COMMUNITY FINANCIAL GROUP, INC. HELD OF
RECORD BY THE UNDERSIGNED ON MARCH 31, 1997 AT THE ANNUAL MEETING OF
SHAREHOLDERS TO BE HELD AT 7:00 PM ON MAY 7, 1997 OR ANY ADJOURNMENT OF SUCH
MEETING.
1. THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE ELECTION OF EACH OF
THE FOLLOWING DIRECTORS: (PLEASE CHECK ONE BOX)
A. PATRICK L. MARTIN [X] FOR ALL NOMINEES
B. KEN F. PARSONS [X] WITHHOLD ALL NOMINEES
C. MICHAEL D. EDWARDS [X] WITHHOLD AUTHORITY TO VOTE FOR ANY
INDIVIDUAL NOMINEE. WRITE NAME BELOW.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED
HEREIN BY THE UNDERSIGNED SHAREHOLDER. UNLESS OTHERWISE SPECIFIED, THE SHARES
WILL BE VOTED FOR AS RECOMMENDED BY THE BOARD OF DIRECTORS.
- -------------------------------------------
SIGNATURE OF SHAREHOLDER(S)
- -------------------------------------------
SIGNATURE OF SHAREHOLDER(S)
NOTE: SIGNATURE SHOULD AGREE WITH NAME ON LABEL AS INDICATED TO THE RIGHT.
DATED: -------------------------
[cad 215] I PLAN TO ATTEND THE MEETING IN OLYMPIA, WASHINGTON, AT 7:00 PM
ON MAY 7, 1997
PLEASE DATE, SIGN, AND RETURN THIS PROXY. EVEN IF YOU PLAN TO ATTEND THE
MEETING, PLEASE RETURN THIS PROXY. THANK YOU.
