<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(mark one)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1997
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OR
[ ] TRANSITION REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
Commission File Number 0-24024
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FIRST COMMUNITY FINANCIAL GROUP, INC.
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(Exact name of registrant as specified in its charter)
WASHINGTON 91 -1277503
- --------------------------------- ------------------------------------
(State or other jurisdiction (IRS Employer Identification Number)
of incorporation or organization)
721 COLLEGE STREET. SE, P.O. BOX 3800, LACEY, WA 98509
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(Address of principal executive offices)
Issuer's telephone number: (360) 459-1100
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the
past 90 days.
Yes X No
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Number of shares of common stock outstanding as
of June 30, 1997: 1,978,886
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Transitional Small Business Disclosure Format (Check one) Yes No X
--- ---
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FIRST COMMUNITY FINANCIAL GROUP, INC.
Table of Contents
PART I - FINANCIAL INFORMATION Page
Item 1 Financial Statements
Condensed Consolidated Balance Sheets. . . . . . . . . . . . . 3
Condensed Consolidated Statements of Income. . . . . . . . . . 4
Condensed Consolidated Statements of Cash Flows. . . . . . . . 5
Notes to Condensed Consolidated Financial Statements . . . . . 6
Item 2 Management's Discussion of Financial Condition and
Analysis or Plan of Operations . . . . . . . . . . . . . . . . 7
PART II - OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . 10
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
2
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FIRST COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets (Unaudited)
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
- ---------------------------------------------------------------------------------------------
June 30 December 31
1997 1996
- --------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 11,292 $ 8,467
Interest bearing deposits in banks 5,087 10,141
Federal funds sold 0 4,000
Securities available for sale 13,042 7,513
Securities held to maturity 1,914 3,182
Loans held for sale 2,286 726
Loans 179,567 130,632
Less allowance for possible credit losses 2,023 1,420
NET LOANS 177,544 129,212
Premises and equipment 9,618 7,593
Goodwill 5,006 0
Other assets 7,568 5,667
TOTAL ASSETS $233,357 $176,501
LIABILITIES
Deposits:
Non-interest bearing $ 31,008 $ 24,719
Interest bearing 171,205 128,715
TOTAL DEPOSITS 202,213 153,434
Short term debt 3,000 0
Long term debt 1,372 1,294
Other liabilities 1,252 854
TOTAL LIABILITIES 207,837 155,582
STOCKHOLDERS' EQUITY
Common stock, par value $2.50 per share; 4,947 4,246
10,000,000 shares authorized, 1,978,886 shares issued
in 1997, and 1,694,008 shares issued in 1996
Surplus 20,293 13,745
Retained earnings 1,507 3,186
Unrealized loss on securities available for sale (22) (13)
Guaranteed KSOP Obligation (1,205) (245)
TOTAL STOCKHOLDERS' EQUITY 25,520 20,919
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $233,357 $176,501
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3
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FIRST COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Income (Unaudited)
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
- ----------------------------------------------------------------------------------------------------------------
Three months ended Six months ended
June 30 June 30
- ----------------------------------------------------------------------------------------------------------------
1997 1996 1997 1996
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $4,731 $3,551 $8,852 $7,035
Federal funds sold and deposits in banks 20 145 66 167
Investments 288 111 593 377
TOTAL INTEREST INCOME 5,039 3,807 9,511 7,579
INTEREST EXPENSE
Deposits 1,807 1,355 3,408 2,706
Other 35 34 61 60
TOTAL INTEREST EXPENSE 1,842 1,389 3,469 2,766
NET INTEREST INCOME 3,197 2,418 6,042 4,813
PROVISION FOR POSSIBLE CREDIT LOSSES 190 74 250 135
NET INTEREST INCOME AFTER PROVISION
FOR POSSIBLE CREDIT LOSSES 3,007 2,344 5,792 4,678
NON-INTEREST INCOME
Service charges on deposit accounts 556 275 875 546
Origination fees on mortgage loans sold 197 133 315 278
Other income 5 163 98 248
TOTAL NON-INTEREST INCOME 758 571 1,288 1,072
NON-INTEREST EXPENSE
Salaries and employee benefits 1,904 1,239 3,359 2,336
Occupancy and equipment 477 372 904 723
Other expense 1,083 668 1,939 1,328
TOTAL NON-INTEREST EXPENSE 3,464 2,279 6,202 4,387
OPERATING INCOME BEFORE INCOME TAXES 301 636 878 1,363
Income Taxes 85 160 249 365
NET INCOME $ 216 $ 476 $ 629 $ 998
EARNINGS PER COMMON SHARE AND COMMON
EQUIVALENT SHARE $0.11 $0.26 $0.32 $0.54
Average number of common
and equivalent shares outstanding 2,008,748 1,845,603 1,983,204 1,842,359
EARNINGS PER COMMON SHARE
ASSUMING FULL DILUTION $0.11 $0.26 $0.31 $0.54
Average number of common and equivalent
shares outstanding - assuming full dilution 2,001,202 1,845,603 2,001,202 1,852,751
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4
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FIRST COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
- -------------------------------------------------------------------------------------------------
Six months ended
June 30
1997 1996
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 629 $ 998
Adjustments to reconcile net income to net cash provided (used)
by operating activities:
Provision for possible credit losses 250 135
Depreciation and amortization 501 382
Gain on sale of loans 40 40
Amortization of goodwill 68 0
Other - net (1,332) (1,143)
Originations of loans held for sale (10,520) (13,176)
Proceeds from sales of loans held for sale 8,960 13,135
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES (1,404) 371
CASH FLOWS FROM INVESTING ACTIVITIES
Net decrease in interest bearing deposits in banks 5,054 7,869
Net (increase) decrease in Federal funds sold 4,000 750
Proceeds from maturities of available-for-sale securities 729 1,645
Purchase of available-for-sale securities (6,503) (681)
Proceeds from maturities of held-to-maturity securities 1,765 1,920
Purchases of held-to-maturity securities (500) (18)
Net increase in loans (48,622) (3,195)
Additions to premises and equipment (2,526) (354)
Increase in goodwill (5,006) 0
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES (51,609) 7,936
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits 48,779 (15,867)
Net (increase) decrease in short-term borrowings 3,000 0
Sale of common stock 7,465 8
Repurchase of common stock (2,511) 0
Repayment of long-term borrowings (882) (143)
Payment for dividends (13) (11)
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 55,838 (16,013)
NET CHANGE IN CASH AND DUE FROM BANKS 2,825 (7,706)
CASH AND DUE FROM BANKS:
Beginning of period 8,467 15,024
END OF PERIOD $ 11,292 $ 7,318
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash payments for:
Interest $ 1,538 $ 2,846
Taxes 170 415
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING ACTIVITIES:
Other real estate acquired in settlement of loans 192 1,020
Increase (decrease) in depreciation of available for sale securities (35) (28)
Increase (decrease) in guarantee of KSOP obligation 980 295
</TABLE>
5
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FIRST COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principals for
interim financial information and with instructions to Form 10-KSB and Rule
10-01 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
adjustments considered necessary for a fair presentation have been included.
Operating results for the three months and six months ended June 30, 1997 are
not necessarily indicative of the results anticipated for the year ended
December 31, 1997.
2. EARNINGS PER COMMON AND EQUIVALENT 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 periods presented. Fully diluted earnings per share
assumes that all dilutive stock options outstanding are issued such that
their dilutive effect is maximized.
6
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
OVERVIEW
The Company's consolidated total assets at June 30, 1997 of $233,357,000
represent a 32.2% increase over December 31, 1996 assets of $176,501,000.
The primary cause of this increase in assets was due to the Company's
acquisition of Prairie Security Bank (PSB) effective February 7, 1997. The
total assets acquired in this transaction were $47,334,000. In addition to
the acquired assets, a recognition of goodwill in the amount of $5,006,000 is
included in the June 30,1997 total assets. Total assets, excluding those
added due to acquisition, still experienced a 2.6% growth over the level at
December 31, 1996.
Total deposit growth in the first half of 1997 amounted to $48,779,000 from
$153,434,000 at December 31, 1996 to $202,213,000 on June 30, 1997, for a
percentage increase of 31.8%. The acquisition of Prairie Security Bank
accounted for $40,176,000 of the increase. The total deposit increase, net
of those added by acquisition, represents a 5.6% increase for the first six
months. The deposit growth is expected to continue due to the acquisition
and its effects of solidifying the Company's position in certain markets
while providing expansion into an additional market.
Deposits will increase by approximately $43,000,000 in the third quarter in
relation to branch purchases. The Company was a successful bidder in the
sale of four Wells Fargo Bank branches. These branches are located in
Hoquiam, Winlock, Toledo and Montesano, Washington. The branches in Winlock,
Toledo and Montesano represent further expansion of the Company's market
area. The Hoquiam branch represents further penetration into our existing
market.
Loan balances in aggregate, net of loan loss reserve, increased by
$49,892,000, or 38.4%, to $179,830,000. The Prairie Security Bank
transaction provided a net increase of $36,923,000. Excluding this
acquisition related increase, loan balances increased $12,969,000 or 10.0%.
The loan to deposit ratio has increased during the first six months from
84.7% to 88.9%. The balances of cash and due from banks, interest bearing
deposits in banks, Federal funds sold and investment securities have
decreased $1,968,000. The total acquired assets of this type amounted to
$6,709,000. The decreases experienced in these assets have been used to fund
loan growth. Premise and equipment growth as well as other asset increases
relate closely to acquired asset increases and have not experienced any
significant changes.
The allowance for possible credit losses reflects management's current
estimate of the amount required to absorb losses on existing loans and
commitments to extend credit. Determination of the appropriate level of the
allowance is based on an analysis of various factors including historical
loss experience based on volumes and types of loans; volumes and trends in
delinquencies and non-accrual loans; trends in portfolio volume; results of
internal and independent external credit reviews; and anticipated economic
conditions. An analysis of the adequacy of the allowance is subject to
quarterly review by the Board of Directors.
The allowance for possible credit losses increased $603,000 in the first half
of 1997. This increase exceeds the ratio at which gross loan balances
increased. The ratio of allowance for possible credit losses to total loans
increased from 1.09% in 1996 to 1.13% at the mid-year point for 1997. The
dollar value change in the allowance consisted of $469,000 of acquisition
related transfer and $250,000 of provisions, offset by $116,000 in net charge
offs. Non-accrual loans increased from $1,898,000 at December 31, 1996 to
$2,455,040 at June 30,1997. Approximately 70% of the Bank's non-performing
loans result from loans acquired with Northwest Community Bank in the fourth
quarter of 1995 and with Prairie Security Bank in the first quarter of this
year. Management continues to closely monitor these portfolios. Additional
provisions to the allowance for possible credit losses may be made as
collection efforts continue on these assets.
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/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.
7
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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 securities, particularly those of shorter maturity,
and are the principal source of asset liquidity. At June 30, 1997, cash,
deposits in banks, Federal funds sold and securities available for sale
totaled $29,421,000. External sources refer to the ability to attract new
liabilities and capital. They include increasing savings and demand deposits,
federal funds purchased, and the issuance of capital and debt securities. At
June 30, 1997, federal funds borrowing lines of credit totaled $14,668,000
(5% of total assets plus $3,000,000) and was used periodically the second
quarter of 1997. The maximum amount of overnight borrowings incurred was
$4,000,000 while the average was limited to $367,000. These incidents were
used primarily to fund very short term cash positions and loan growth. The
Bank also has preestablished borrowing lines available with the Federal Home
Loan Bank of approximately $11,668,000 (5% of total assets). This credit
facility has remained unused in the first half of 1997.
Management believes the Bank's liquidity position at June 30, 1997, 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. Management's objectives are to monitor and control interest rate risk
and ensure predictable and consistent growth in net interest income.
Management considers any asset or liability which matures, or is subject to
repricing within one year to be interest sensitive, although continual
monitoring is performed for other time intervals as well. The difference
between interest sensitive assets and liabilities for a defined period of
time is known as the interest sensitivity "gap", and may be either positive
or negative. If positive, more assets reprice before liabilities. If
negative, the reverse is true. Gap analysis provides a general measure of
interest rate risk but does not address complexities such as prepayment risk,
interest rate floors and ceilings imposed on financial instruments, interest
rate dynamics and customers' response to interest rate changes. Currently
the Banks' interest sensitivity gap is negative within one year. Assuming
that general market interest rate changes affected the repricing of assets
and liabilities in equal magnitudes, this indicates that the effects of
rising interest rates on the Company would be a decrease in the net interest
margin, whereas falling interest rates would cause a corresponding increase
in the margin.
CAPITAL
Consolidated capital of FCFG increased $4,601,000 during the first half of
1997. The components increasing this amount included surplus as a result of
the acquisition as well as increased retained earnings. Reductions to
capital included a limited stock repurchase of outstanding shares, unrealized
loss adjustment on available for sale securities and an increase in the
guarantee of a loan obligation on behalf of the Company's KSOP.
There are regulatory constraints placed upon capital adequacy, and it is
necessary to maintain an appropriate ratio between capital and assets.
Regulations require banks and holding companies to maintain a minimum
"leverage" ratio (primary capital ratio) of total assets. For the most
highly rated holding companies this ratio must be at least 3%, and for others
it must be 4 to 5%. At June 30, 1997, the Company's leverage ratio was
8.80%, compared to 11.96% at year-end 1996. This decrease is due to the
effects of the use of purchase accounting in the acquisition of PSB. For
regulatory purposes, the associated goodwill is treated as a reduction of
capital. In addition, holding companies are required to meet minimum
risk-based capital guidelines under which risk percentages are assigned to
various categories of assets and off-balance-sheet items to calculate a
risk-adjusted capital ratio. Tier I capital generally consists of common
stockholders' equity, less goodwill, while Tier II capital includes the
allowance for possible loan losses, subject to 1.25% limitation of
risk-adjusted assets. The rules require Tier II capital of 4% of
risk-adjusted assets and total capital (combined Tier I and Tier II) of 8%.
At June 30, 1997, the Tier I capital ratio was 10.37%, and total capital was
11.39%.The similar ratios at December 31, 1996 were a Tier I capital ratio of
14.86% and a total capital ratio of 15.77%.
RESULTS OF OPERATIONS
GENERAL
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Net income is largely dependent upon the difference between the interest
received on earning assets and the interest paid on interest bearing
liabilities and is defined as net interest income. Net income is also
affected by the provision for loan losses, other non-interest income and
other non-interest expense.
Net income for the three months ended June 30, 1997 was $216,000, compared
to $476,000 for the three months ended June 30, 1996. This 54.6% decrease
is due to a $1,185,000 increase in non-interest expense and a $453,000
increase in interest expense. The provision for loan losses also increased
by $116,000. This was offset to a lesser degree by a $1,232,000 increase in
interest income, a $187,000 increase in non-interest income, and a decrease
of $75,000 in income taxes. Each of these increases and the corresponding
decrease were primarily a factor of the acquisition, its related activities
and the increased balances upon which interest was generated.
Net income for the six months ended June 30, 1997 was $629,000, compared to
$998,000 for the six months ended June 30, 1996. This 37.0% decrease is due
to a $1,815,000 increase in non-interest expense and a $703,000 increase in
interest expense. The provision for loan losses also increased by $115,000.
This was offset to a lesser degree by a $1,932,000 increase in interest
income, a $216,000 increase in non-interest income, and a decrease of
$116,000 in income taxes. Each of these increases and the corresponding
decrease were primarily a factor of the acquisition, its related activities
and the increased balances upon which interest was generated.
NET INTEREST INCOME
Net interest income for the six months ended June 30, 1997 increased
$1,229,000 over the comparable period in 1996. The net interest margin
increased, moving 9 basis points from 6.41% to 6.50%.
Interest income for the six months ended June 30, 1997 increased $1,932,000
over the six months ended June 30, 1996. Of this increase, approximately
$1,842,000 is attributed to an increase in the average volume of earning
assets, in addition to approximately $90,000 as a result of a 12 basis point
increase in the aggregate yield on earning assets from 10.06% to 10.18%.
Total interest expense for the six months ended June 30, 1997 increased over
the comparable period of the prior year by $703,000. Of this increase,
approximately $748,000 was due to an increase in the average volume of
interest bearing liabilities, and offset by a $45,000 reduction due to a 7
basis point decrease in the aggregate cost of funds.
NON-INTEREST INCOME
Total non-interest income for the quarter ended June 30, 1997 increased 32.7%
or $187,000 from the comparable quarter of 1996. Of this amount, $281,000 is
due to an increase in service charges on deposit accounts and a $64,000
increase in loan origination fees. These increases are offset by a $158,000
decrease in other income. The decrease in other income is primarily due to
the write down of limited partnership investments acquired with Northwest
Community Bank. The effect of this event is nearly fully realized and will
not continue materially in the future.
Total non-interest income for the six months ended June 30, 1997 increased
20.1% or $216,000 from the comparable quarter of 1996. Of this amount,
$329,000 is due to an increase in service charges on deposit accounts and a
$37,000 increase in loan origination fees. These increases are offset by a
$150,000 decrease in other income. The decrease in other income is primarily
due to the write down of limited partnership investments acquired with
Northwest Community Bank. The effect of this event is nearly fully realized
and will not continue materially in the future.
NON-INTEREST EXPENSE
Total non-interest expense for the quarter ended June 30, 1997 increased
$1,185,000 over the second quarter of 1996. Of this increase in the level of
non-interest expense, $665,000 reflects the increased salaries and employee
benefits of the organization in its post-acquisition structure. Occupancy
and equipment increased $105,000 as the result of the additional locations
and resulting equipment needs. Other expense increased $415,000 as the
organization continues to incorporate the sizable growth that has taken place
as well as the implementation of projects for the future benefit of the
company. These expenses have increased from the start-up and operation of a
new branch as well as incurring costs in anticipation of the purchase of 4
Wells Fargo branches in July. Much of the initial expense of marketing and
customer contact have taken place while future operational expense will
continue.
Total non-interest expense for the six months ended June 30, 1997 increased
$1,815,000 over the first half of 1996. Of this increase in the level of
non-interest expense, $1,023,000 reflects the increased salaries and employee
benefits of the organization in its post-acquisition structure. Occupancy
and equipment increased $181,000 as the result of the additional locations
and resulting equipment needs. Other expense increased $611,000 as the
organization continues to incorporate the sizable growth that has taken place
as well as the implementation of projects for the future benefit of the
company. These expenses have increased from the start-up and operation of a
new branch as well as incurring costs in anticipation of the purchase of 4
Wells Fargo branches in July. Much of the initial expense of marketing and
customer contact have taken place while future operational expense will
continue.
9
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FIRST COMMUNITY FINANCIAL GROUP, INC.
PART II - OTHER INFORMATION
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(10)m. Form of Settlement Agreement between Michael D. Edwards
and Marieke G. Edwards, and First Community Financial
Group, Inc. and First Community Bank of Washington.
(99)a. Form of Joint Statement to be issued by First Community
Bank of Washington and Michael D. Edwards.
(b) Reports on Form 8-K None
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FIRST COMMUNITY FINANCIAL GROUP, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST COMMUNITY FINANCIAL GROUP, INC.
(Registrant)
Date: August 14, 1997 By: /s/ Ken F. Parsons
----------------------------------
Ken F. Parsons
President, Chief Executive Officer
By: /s/ James F. Arneson
----------------------------------
James F. Arneson
Executive Vice President,
Chief Financial Officer
(Principal Accounting Officer)
11
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SETTLEMENT AGREEMENT
Michael D. Edwards and Marieke G. Edwards, individually as "Mr. Edwards"
and "Mrs. Edwards", respectively, and collectively as "the Edwards", and
First Community Bank and First Community Financial Group, collectively as
"the Bank", intending to settle and resolve all possible disputes related in
any way to Mr. Edwards' employment by the Bank or Prairie Security Bank,
memberships on the Bank Boards or Prairie Security Bank's Board of Directors,
and/or any other relationships with the Bank and/or Prairie Security Bank and
the ending of those relationships, and/or related in any way to Mr. Edwards'
Bank stock options and stock, agree as follows:
1. All parties acknowledge that they enter into this Agreement
knowingly and voluntarily with advice of counsel. As contemplated by the
federal Age Discrimination in Employment Act ("ADEA"), Mr. Edwards
specifically acknowledges that he has had sufficient time to consider
carefully the terms of this Agreement and to consult with an attorney of his
choice, which he is hereby advised to do before signing this Agreement.
2. Mr. Edwards' thirty days of paid administrative leave ended July
18, 1997, which date is deemed to be the effective date of his resignations
from Bank employment and Bank Board memberships. Mr. Edwards hereby confirms
his resignations from said employment and Board positions and agrees to
complete any necessary forms to reflect his resignations. Mr. Edwards agrees
not to seek rehire as an employee of the Bank or to seek a position on either
Bank Board. Mr. Edwards acknowledges that his salary has been paid through
the last day of his administrative leave.
3. So long as the Edwards are not in breach of this Agreement, the
Bank agrees to do the following:
a. Within two business days after receipt by Bank counsel Alice F.
Gustafson of properly executed duplicate originals of this Agreement,
including the attached Non-Revocation Statement, deliver to the Edwards'
counsel, Cynthia D. Turner, a check for $130,000 for general compensatory
damages, payable to Owens Davies Mackie, P.S. in Trust for Michael D.
Edwards, and a check for $30,000 for attorneys' fees, payable to Owens
Davies Mackie, P.S.
b. For the period beginning August 1, 1997 and ending December 31,
2001, pay Mr. Edwards as general compensatory damages and in consideration
for the noncompete provisions in paragraph 15 below one hundred six (106)
payments of $3,490.57 each, payable semi-monthly. Although not wages, the
parties agree that for the Bank's convenience, such payments will be made
on the Bank's regular semi-monthly paydays during said period, except that
any payment due prior to the
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execution by the Edwards of this Agreement will be made to Mr. Edwards
within two business days following the receipt by Ms. Gustafson of
properly executed duplicate originals of this Agreement. Payments
pursuant to this paragraph will be made by mailing checks to Mr. Edwards
at his residence.
c. For the period beginning August 1, 1997 and ending December 31,
2001, pay $160 per month to Mr. Edwards to defray the cost of any medical
insurance coverage Mr. Edwards may elect to continue under COBRA or may
otherwise purchase. Payments pursuant to this paragraph will be made by
mailing checks each month on the first of the Bank's two regular
semi-monthly paydays to Mr. Edwards at his residence, except that any
payment due prior to the execution by the Edwards of this Agreement will
be made to Mr. Edwards within two business days following the receipt by
Ms. Gustafson of properly executed duplicate originals of this Agreement.
The Bank will also provide one fully executed original of this Settlement
Agreement to Ms. Turner as soon as reasonably practical.
4. The Bank agrees to buy, and the Edwards agree to sell, the Edwards'
present 3,949 shares of Bank stock, together with any additional shares
distributed as stock dividends on said shares, for a cash price of $80,000 no
earlier than February 10, 1998 and no later than July 1, 1998.
5. The Bank hereby extends the deadline to July 1, 1999 for the
exercise by Mr. Edwards of his presently vested stock options for 15,657
shares. In all other respects, the terms of said options, including without
limitations, those provisions regarding adjustments based on changes in
capitalization, remain the same. The parties acknowledge that the current
exercise price for such options is $8.18 per share.
6. The parties agree that any stock options of Mr. Edwards which were
not vested as of July 18, 1997, including those for 40,000 shares granted
pursuant to Mr. Edwards' Employment Agreement with the Bank dated September
11, 1996 and those for 7,829 shares granted pursuant to an agreement between
Mr. Edwards and Prairie Security Bank are canceled upon execution by all
parties of this Agreement. The Edwards acknowledge that there are no other
unvested options.
7. The Bank agrees to pay the full mediation fee for the mediation
conducted by Elizabeth Martin.
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8. Mr. Edwards agrees to purchase the Bank automobile he presently
uses for $23,600, which amount shall be offset against the payment to be made
by the Bank pursuant to paragraph 3a above.
9. With the exception of the laptop computer and the pager currently
in his possession, Mr. Edwards agrees to return all Bank keys, credit cards,
cellular telephones and other property of the Bank which he may have, or have
control of, by delivering same no later than the time of his execution of
this Agreement to Ms. Turner, who will make such items immediately available
to the Bank. Mr. Edwards agrees to purchase the pager for $50, which amount
shall be offset against the payment to be made under paragraph 3a above.
Further, the Bank may offset against the payment to be made by it pursuant to
paragraph 3a above, monies Mr. Edwards owes to the Bank to settle his expense
accounts. Mr. Edwards will promptly pay any of his expenses reflected on
credit card statements received after the date of this Agreement. In
addition, Mr. Edwards is responsible for all personal charges on his credit
card, pager and cellular telephones, regardless of when incurred. All such
charges and all other sums, if any, which Mr. Edwards owes the Bank, may be
offset against sums owed him by the Bank pursuant to this Agreement. The
Bank will provide documentation of any such charges and offsets to Mr.
Edwards.
10. The Bank has delivered Mr. Edwards' mail and the personal
possessions from his Bank office to Ms. Turner. The Bank agrees to forward
any personal mail that it receives in the future for Mr. Edwards to his
residence.
11. Mr. Edwards agrees to cooperate with the Bank and its attorneys in
the Bank's defense of any and all litigation and disputes which are based on
events that occurred during the term of his employment by the Bank or Prairie
Security Bank, as the case may be, including but not limited to the presently
pending lawsuit by Plaintiff Jamie Riveness. Mr. Edwards acknowledges that
he will not be paid a fee by the Bank for his time spent in complying with
this paragraph, other than statutorily provided witness fees and expenses.
12. The parties agree that the First Community Bank of Washington
Employment Agreement for Mr. Edwards dated September 11, 1996 is terminated
and the terms of this Agreement are intended to supersede the terms of said
Employment Agreement. With respect to rights under his Executive
Supplemental Income Agreement, the parties agree that Mr. Edwards, at
retirement, is entitled to the Actuarially Determined Amount of his
Retirement Benefit accrued through June 18, 1997, which the parties agree is
$15, 104.10. Said Retirement Benefit of $15,104.10 is to be paid as a lump
sum upon Mr. Edwards' request but no later than within a reasonable period
after he attains age 65. Further, the parties agree that the Death Benefit
provided by Mr. Edwards' Executive Supplemental Income Agreement is $33,908
in the first year following his death, $25,431
3
<PAGE>
for each of the next four years and $16,954 for each of the next ten years
after that, but that Mr. Edwards is entitled to such Death Benefit only if he
dies prior to receiving said Retirement Benefit. The Bank acknowledges that
nothing in this Agreement is intended to be a waiver of Mr. Edwards' rights
in his 401(k) plan or KSOP.
13. Mr. Edwards acknowledges that in the course of his employment with
First Community Bank and Prairie Security Bank and his service as a member of
the Bank Boards of Directors and of the Prairie Security Bank Board of
Directors, he has obtained knowledge of confidential information and other
secrets concerning the Bank and Prairie Security Bank and their business and
affairs which are valuable to the Bank and which it does not want disclosed.
Mr. Edwards promises to maintain all such information on a confidential basis
and not to disclose it to any third party, without the Bank's express written
consent. This promise of Mr. Edwards is intended to and will apply in the
broadest sense possible to information regarding the Bank's business
activities and customers and is not intended to be limited solely to matters
which might meet the legal definition of "trade secrets" under Washington
law. Confidential information shall not include any information which is
otherwise in the public domain or which was lawfully received by Mr. Edwards
from a source other than the Bank, which source was not under any obligation
of confidentiality to the Bank.
14. Through the period ending December 31, 2001, Mr. Edwards shall not
induce or attempt to induce any Bank employee to leave the employ of the Bank
or in any way interfere with the relationship between the Bank and any
employee of the Bank. Further, through the period of payments to be made
pursuant to paragraphs 3b and 3c above, Mr. Edwards agrees not to induce or
attempt to induce any customer, shareholder, trade association, supplier,
licensee, or other person or business to change its relationship with the
Bank.
15. The parties agree to the following noncompete provisions:
a. Until the end of the period of payments to be made pursuant to
paragraphs 3b and 3c above, Mr. Edwards shall not in Thurston, Pierce,
Lewis, Mason or Grays Harbor Counties (the "Noncompetition Area"):
a) engage in efforts to organize or invest in a new financial institution
(for purposes of this Agreement, "financial institution" is defined to be a
bank, mortgage company, or other entity in the business of making
commercial, consumer or real estate loans or loan equivalents) or b) work
as an executive or senior level officer, manager, loan officer, loan
representative or consultant or seek business for a financial institution.
b. If Mr. Edwards has violated these noncompete provisions, the Bank
will advise him in writing and Mr. Edwards will have ten calendar days
following the date of such notice to cure such violation. The Bank may not
exercise any
4
<PAGE>
remedies hereunder unless and until such ten day period has expired
without cure of such violation.
c. Mr. Edwards agrees to submit annually by April 15 of each year
copies of all W-2 and 1099 forms reporting income paid to him during the
previous tax year and copies of the first two pages of his completed 1040
form for said year to his counsel, who will then verify that all W-2 and
1099 forms have been included. Said counsel will then forward copies of
all of said W-2 and 1099 forms (amounts paid may be redacted) to Graham &
Dunn at its Seattle office, together with said counsel's certification that
the income shown on the W-2 and 1099 forms is consistent with the 1040.
The Bank acknowledges that Graham & Dunn will not advise the Bank of any
information in such forms, unless the firm in good faith perceives a breach
of this Agreement. The obligations in this paragraph apply only to tax
years in which Mr. Edwards is subject to these noncompete provisions, for
either the entire year or part of it.
d. After July 15, 1999, Mr. Edwards may engage in activity
prohibited by these noncompete provisions, but all Bank payment obligations
pursuant to paragraphs 3b and 3c above will cease as of the date of his
first engaging in such activity. Mr. Edwards agrees to give the Bank
reasonable advance notice of his intent to engage in such activity.
e. Mr. Edwards' activities in various national trade associations
(including their for-profit subsidiaries which may serve financial
institutions in the Noncompetition Area, but excluding those for-profit
subsidiaries which may provide services in competition with the Bank) or
his service as an expert witness (other than in litigation against or
involving the Bank) or consultant to law firms on specific litigation
(other than on litigation against or involving the Bank) shall not
constitute violations of these noncompete provisions.
f. The parties agree that if a trial judge with jurisdiction over a
dispute related to this Agreement should determine that the noncompete
provisions set forth in this Agreement are unreasonably broad, the parties
authorize said trial judge to narrow same so as to make them reasonable,
given all relevant circumstances, and to enforce same.
16. Mr. Edwards acknowledges that his breach of paragraphs 13, 14 or 15
above would cause irreparable injury and damage which cannot be reasonably or
adequately compensated by damages. Therefore, in addition to any other
remedies available to the Bank, Mr. Edwards agrees that the Bank will have
the right to seek to enjoin any acts contrary to the terms of those
paragraphs and that injunctive relief would be an appropriate remedy.
5
<PAGE>
17. The Bank's obligations hereunder are in full settlement of any and
all claims in connection with Mr. Edwards' employment by First Community Bank
and Prairie Security Bank, memberships on the Bank Boards and Prairie
Security Bank's Board of Directors, and/or any other relationships with the
Bank and/or Prairie Security Bank and the ending of those relationships and
in connection with the Edwards' Bank stock and Mr. Edwards' stock options
which were not vested as of July 18, 1997, including but not limited to any
claims which could be made under any stock option agreement, any implied or
express contract, the ADEA, or any other federal, state or local law
(statutory or common). The Edwards accept the Bank's undertakings in this
Agreement as full settlement of any and all such claims against the Bank
and/or its shareholders, directors (in their capacity as directors), and
employees, known or unknown, including but not limited to any claim for
attorneys' fees. The Edwards realize this constitutes a full and final
settlement of any and all such claims, and, except only for the obligations
undertaken in this Agreement, this settlement releases the Bank (and its
shareholders, directors (in their capacity as directors) and employees, and
anyone else against whom the Edwards could assert a claim related to said
relationships and their ending, and the spouses and marital communities of
all such individuals), from any further liability to the Edwards (or to
anyone whom either has the power to bind in this settlement) in connection
with such claims. This settlement is not an admission that the Bank or any
other person or organization violated any law or failed to fulfill any duty
to the Edwards.
18. The Edwards' obligations hereunder are in full settlement of any
and all claims in connection with Mr. Edwards' employment with First
Community Bank and Prairie Security Bank and memberships on the Bank's Boards
and Prairie Security Bank's Board of Directors, and/or any other
relationships with the Bank and/or Prairie Security Bank and the ending of
those relationships, including but not limited to any claims which could be
made under any implied or express contract or any other federal, state or
local law (statutory or common), but excluding any claims arising from acts
and omissions which were intentional and contrary to statutory or common law
or which resulted in an improper personal benefit to Mr. Edwards. The Bank
accepts the Edwards' undertakings in this Agreement as full settlement of any
and all such claims against the Edwards, known or unknown, including but not
limited to any claim for attorneys fees. The Bank realizes this constitutes a
full and final settlement of any and all such claims, and, except only for
the obligations undertaken in this Agreement, this settlement releases the
Edwards (and anyone else against whom the Bank could assert a claim related
to said relationships and their ending, and the spouses and marital
communities of all such individuals), from any further liability to the Bank
(or to anyone the Bank has the power to bind in this settlement) in
connection with such claims. This settlement is not an admission that the
Edwards violated any law or failed to fulfill any duty to the Bank.
19. The parties acknowledge that the mutual releases set forth in the
above two paragraphs are not intended to abridge or alter any indemnification
rights Mr. Edwards may have for his service as a member of the Bank's Boards
or the Board of Prairie Security
6
<PAGE>
Bank as provided in the Articles of Incorporation and Bylaws of the Bank as of
the date of this Agreement or as they may hereafter be amended.
20. In the absence of a valid court order requiring disclosure or as
otherwise required to comply with the law, the Edwards agree to keep
confidential the negotiations regarding the terms of this Agreement and the
terms themselves, except only as to the Edwards' attorneys and financial
advisors, who shall be instructed by the Edwards to keep same confidential as
well. In the absence of a valid court order requiring disclosure or as
otherwise required to comply with the law, the Bank agrees to keep
confidential the negotiations regarding the terms of this Agreement and the
terms themselves, except only a) as to present and future employees who have
a need to know and present and future Bank Board members, attorneys and
accountants, all of whom shall be instructed by the Bank to keep same
confidential as well, and b) in those instances where the Bank in its good
faith business judgment is required to make disclosures.
21. The parties agree that their comments to persons or entities not
covered by the exceptions to the confidentiality provisions in paragraph 20
above will be limited to the substance of the material contained in the
attached Joint Statement. In other words, for example, if Mr. Edwards is
asked to comment on his separation from the Bank by anyone other than his
attorneys or financial advisors, his comments will be limited to the
substance of the material contained in said Joint Statement.
22. The parties shall refrain from making any disparaging remarks or
statements about each other.
23. In the event of a dispute regarding the terms of this Agreement and
compliance with it, the parties agree to submit any such disputes to
mediation by a mutually acceptable mediator and then, if such dispute is not
resolved fully by mediation, to binding arbitration, the latter to be
conducted in accordance with the Commercial Arbitration Rules of the American
Arbitration Association. The parties agree that the substantially prevailing
party in any such dispute shall be entitled to recover its/their costs and
reasonable attorneys' fees from the other party(ies).
24. The release provisions of this Agreement will remain in full force
and effect, except only to the extent revoked by Mr. Edwards pursuant to
paragraph 26 below, even if a provision of this Agreement is breached.
7
<PAGE>
25. The invalidity or unenforceability of all or part of any provision
of this Agreement will in no way affect the validity or enforceability of any
other provision of this Agreement.
26. Mr. Edwards understands that he may revoke his release of claims
under the ADEA during the seven days following his signing of this Agreement.
He further understands that the release of any ADEA claims will not become
effective or enforceable and the Bank will not be obligated to make the
payments specified in paragraph 3a above until the seven day revocation
period has expired and he has properly executed the attached Non-Revocation
Statement.
27. This Agreement shall be binding upon the parties hereto, the
Edwards' heirs, and the Bank's successors and assigns. Without limiting the
foregoing, the Bank acknowledges and agrees that all payments due Mr. Edwards
hereunder shall continue to be paid in accordance with this Agreement
notwithstanding his death.
28. Any demand, request or notice which either party hereto desires or
may be required to make or deliver to the other shall be in writing and shall
be deemed given when delivered by facsimile, personally delivered, delivered
by private courier service (such as Federal Express), or three days after
being deposited in the United States Mail in registered or certified form,
return receipt requested, addressed as follows:
To Edwards: Michael D. Edwards
920 East Bay, Unit 3D-301
Olympia WA 98506
With a copy to: Owens Davies Mackie, P.S.
926 24th Way SW
P.O. Box 187
Olympia WA 98507
Attn: Brian L. Budsberg
To the Bank: First Community Bank
721 College Street SE
P.O. Box 3800
Lacey WA 98509-3800
Attn: Ken F. Parsons, Sr.
8
<PAGE>
With a copy to: Graham & Dunn PC
1420 Fifth Avenue, 33rd Floor
Seattle WA 98101
Attn: Alice F. Gustafson
or to such other single address and person as either party may communicate to
the other by like written notice.
EXECUTED as of the dates indicated below.
FIRST COMMUNITY BANK
Date:____________________ By_________________________________
Its________________________________
FIRST COMMUNITY FINANCIAL GROUP
Date:____________________ By_________________________________
Its________________________________
Date:____________________ ___________________________________
MICHAEL D. EDWARDS
Date:____________________ ____________________________________
MARIEKE G. EDWARDS
9
<PAGE>
NON-REVOCATION STATEMENT
I declare that I have not revoked my release of claims under
the Age Discrimination in Employment Act during the seven days following my
execution of my Settlement Agreement with First Community Bank and First
Community Financial Group and that such release is now effective and
enforceable.
Date:____________________
_______________________
MICHAEL D. EDWARDS
10
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 11,292
<INT-BEARING-DEPOSITS> 5,087
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 13,042
<INVESTMENTS-CARRYING> 1,914
<INVESTMENTS-MARKET> 0
<LOANS> 181,853
<ALLOWANCE> 2,023
<TOTAL-ASSETS> 233,357
<DEPOSITS> 202,213
<SHORT-TERM> 3,000
<LIABILITIES-OTHER> 1,252
<LONG-TERM> 1,372
0
0
<COMMON> 4,947
<OTHER-SE> 20,573
<TOTAL-LIABILITIES-AND-EQUITY> 233,357
<INTEREST-LOAN> 8,852
<INTEREST-INVEST> 593
<INTEREST-OTHER> 66
<INTEREST-TOTAL> 9,511
<INTEREST-DEPOSIT> 3,408
<INTEREST-EXPENSE> 3,469
<INTEREST-INCOME-NET> 6,042
<LOAN-LOSSES> 250
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 6,202
<INCOME-PRETAX> 878
<INCOME-PRE-EXTRAORDINARY> 878
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 629
<EPS-PRIMARY> .32
<EPS-DILUTED> .31
<YIELD-ACTUAL> 10.18
<LOANS-NON> 2,455
<LOANS-PAST> 3,972
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,420
<CHARGE-OFFS> 125
<RECOVERIES> 9
<ALLOWANCE-CLOSE> 2,023
<ALLOWANCE-DOMESTIC> 2,023
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<PAGE>
JOINT STATEMENT
Ken Parsons, Chief Executive Officer and Chairman of the Board of First
Community Bank, and Mike Edwards, President, have jointly announced Edwards'
resignation as President and Director.
Edwards organized and was President of Prairie Security Bank in Yelm. He was
appointed President of First Community Bank when it merged with Prairie
Security earlier this year. The merger created a bank with $230 million in
assets, the 14th largest in the state.
The Bank expressed its appreciation for Edwards' leadership with the merger
and related issues. Subsequent to the merger, the Bank and Edwards agreed
that bank management streamlining was necessary and that the role of
President would be consolidated with that of Chief Executive Officer.
Paul DeTray, Chairman of First Community Financial Group, wished Edwards well
in his future endeavors. DeTray confirmed that Parsons was asked to resume
the position of President.
11
