<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No. )
Filed by the Registrant / /
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 Section240.14a-11(c) or
Section240.14a-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:
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(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.:
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(3) Filing Party:
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(4) Date Filed:
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<PAGE>
FIRST COMMUNITY FINANCIAL GROUP, INC.
721 College Street, S.E.
P.O. Box 3800
Lacey, WA 98509-3800
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 Tuesday, May 12, 1998, at 6:00 p.m., for the purpose of
considering and voting upon the following matters:
1. ELECTION OF DIRECTORS. To elect two Directors for a term of three years
expiring in the year 2001, or until their successors have been elected
and qualified.
2. WHATEVER OTHER BUSINESS may properly be brought before the meeting or
any adjournment of the meeting.
Only those shareholders of record at the close of business on April 10,
1998, will be entitled to notice of, and to vote at the meeting.
By Order of the Board of Directors
James F. Arneson
Secretary
Lacey, Washington
April 13, 1998
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
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 April 13, 1998, for use in connection with the Annual
Meeting of Shareholders of First Community Financial Group, Inc. ("FCFG" or
"Company") to be held on Tuesday, May 12, 1998. Only those shareholders of
record at the close of business on April 10, 1998, 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 1,995,426.
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 two nominees listed in this Proxy Statement,
unless otherwise directed. Any proxy given by a shareholder may be revoked
before its 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 present size of the board has been fixed at seven (7) 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 separately for the five Board positions. In order to
be elected as a director at the Annual Shareholders Meeting, a nominee must
receive a plurality of the votes present at the meeting.
If you abstain from voting either by Proxy or in person at the Annual
Shareholders Meeting, you will effectively vote "AGAINST" a nominee, because
your votes cannot be deemed voted "FOR" a nominee. In addition, "broker
non-votes" will have no effect because they are not considered "shares present"
for voting purposes. Proxies cannot be voted for more than two nominees.
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. Panowicz and Wilcox for election as directors
for three-year terms to expire in the year 2001. The Board of Directors has no
present knowledge that any of the nominees will refuse or be unable to serve. If
Messrs. Panowicz and Wilcox, or either 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, 1998 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 2001
(CLASS II DIRECTORS)
<TABLE>
<CAPTION>
SHARES & PERCENTAGE OF
COMMON STOCK
NAME, AGE AND PRINCIPAL OCCUPATION BENEFICIALLY OWNED AS
TENURE AS OF DIRECTOR DURING OF
DIRECTOR LAST FIVE YEARS JANUARY 1,1998
- --------------------------------- ------------------------ ----------------------
<S> <C> <C>
A. Richard Panowicz, 53 President, Archives 91,833(2)
Director since 1995 Northwest (1) 4.60%
Kenneth M. Wilcox, 68 Retired Pharmacist 47,323(3)
Director since 1979 2.37%
</TABLE>
- -------------------------------------------------------------------------------
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE "FOR" ALL
OF THE DIRECTOR NOMINEES
- -------------------------------------------------------------------------------
- ------------------------
(1) Mr. Panowicz also serves as Chairman of the Board of The Office Planning
Group, Inc., 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 16,847 shares held jointly with spouse; 12,138 shares held in an
IRA account for the benefit of Mr. Panowicz; 48,241 unallocated shares held
by the KSOP of which Mr. Panowicz is a trustee; and 11,148 shares which
could be acquired within 60 days by the exercise of stock options.
(3) Includes 33,358 shares held jointly with spouse; 2,817 shares held in an IRA
account for the benefit of Mr. Wilcox; and 11,148 shares which could be
acquired within 60 days by the exercise of stock options.
<PAGE>
DIRECTORS WITH TERM EXPIRING IN 1999
(CLASS III DIRECTORS)
<TABLE>
<CAPTION>
SHARES & PERCENTAGE OF
COMMON STOCK
PRINCIPAL OCCUPATION BENEFICIALLY OWNED AS
NAME, AGE AND OF DIRECTOR DURING OF
TENURE AS DIRECTOR LAST FIVE YEARS JANUARY 1,1998
- --------------------------------- ------------------------ ----------------------
<S> <C> <C>
E. Paul DeTray, 64 President, DeTray's 139,743(4)
Director since 1979 Quality Homes 7.00%
John D. Durney, 49 Vice President/Co- Owner, 8,859(5)
Director since 1987 Durney Agency, Inc. 0.45%
Michael N. Murphy, 55 Washington State Deputy 14,713(6)
Director since 1978 Auditor 0.74%
</TABLE>
DIRECTORS WITH TERM EXPIRING 2000
(CLASS I DIRECTORS)
<TABLE>
<CAPTION>
SHARES & PERCENTAGE OF
COMMON STOCK
PRINCIPAL OCCUPATION BENEFICIALLY OWNED AS
NAME, AGE AND OF DIRECTOR DURING OF
TENURE AS DIRECTOR LAST FIVE YEARS JANUARY 1,1998
- --------------------------------- ------------------------ ----------------------
<S> <C> <C>
Patrick L. Martin, 59 (7) President, Patrick's 40,115(8)
Director since 1980 Decorating Center 2.01%
Ken F. Parsons, 52 President & CEO; FCFG 195,148(9)
Chairman, Director & 9.78%
CEO; Bank & IMS
</TABLE>
- ------------------------
(4) Includes 48,126 shares held jointly with spouse; 17,860 shares held by
DeTray's Quality Homes; 7,507 held by the DeTray Family Partnership; 48,241
unallocated shares held by the KSOP, considered beneficially owned by Mr.
DeTray as Trustee for the KSOP; and 11,148 shares which could be acquired
within 60 days by the exercise of stock options.
(5) Includes 1,712 shares held in IRA accounts for the benefit of Mr. Durney;
1,377 shares owned by spouse; 115 shares held in an IRA for the benefit of
Mrs. Durney; 115 shares owned by minor children; and 3,333 shares which
could be acquired within 60 days by the exercise of stock options.
(6) Includes 3,333 shares which could be acquired within 60 days by the exercise
of stock options.
(7) Mr. Martin also serves as director of Carpet Co-op of America, d/b/a Carpet
One, and Leading Edge Marketing, both public companies which have a class of
securities registered under Section 12 or subject to the requirements of
Section 15(d) of the Securities Exchange Act of 1934.
(8) Includes 14,439 shares held jointly with spouse; 2,819 shares held in an IRA
account for the Benefit of Mr. Martin; 325 shares held in IRA account for
the benefit of Mr. Martin's wife; 694 shares held by Mr. Martin's mother,
over which Mr. Martin has voting and dispositive power; 11,148 shares which
could be acquired within 60 days by the exercise of stock options.
(9) Includes 54,519 shares held jointly with spouse; 14,427 and 1,600 held in
IRA accounts for the benefit of Mr. Parsons; 665 shares representing Mr.
Parsons ownership in an investment partnership; 1,011 shares held in an IRA
for the benefit of Mrs. Parsons; 5,301 shares held in the KSOP for the
benefit of Mr. Parsons; 48,241 unallocated shares held by the KSOP,
considered beneficially owned by Mr. Parsons as trustee for the KSOP; and
69,384 shares which could be acquired within 60 days by the exercise of
stock options.
<PAGE>
INFORMATION REGARDING THE BOARD OF DIRECTORS AND ITS COMMITTEES
BOARD OF DIRECTORS
The Board of Directors of FCFG generally meets on a quarterly basis with
additional meetings as necessary. There were seven (7) meetings of the Board of
Directors of FCFG during 1997. 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 eight (8) meetings of the Executive Committee during 1997.
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), DeTray, Murphy, and
Wilcox. There were five (5) meetings of the Audit Committee during 1997.
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
allowed the directors, 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. Directors were each paid a $1,000 performance based fee in February 1997
for 1996 performance.
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, 1997, options to
purchase 80,708 shares remained granted and unexercised under the 1994 Plan and
1989/1992 Plans.
<PAGE>
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 and
significant subsidiaries whose total compensation during the last fiscal year
exceeded $100,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
-------------------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
--------------------------------------------------- ---------------------------- -------------
OTHER RESTRICTED SECURITIES
NAME AND ANNUAL STOCK UNDERLYING LTIP ALL OTHER
PRINCIPAL SALARY BONUS COMPENSATION AWARDS OPTIONS/ PAYOUTS COMPENSATION
POSITION YEAR ($)(1) ($) ($) ($) SARS(#)(2) ($) (3)($)
- ------------ --------- ---------- --------- ----------------- --------------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Ken F. 1997 $163,200 $18,000 $0 0 0 0 $9,000
Parsons 1996 $130,203 $33,789 $0 0 100,000 0 $9,900
President, 1995 $108,933 $26,000 $0 0 0 0 $8,844
Director &
CEO-- FCFG
Chairman,
Director &
CEO-- Bank
Chairman,
Director &
CEO-- IMS(4)
</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 1996, or $8,100 for 1997 for Mr. Parsons.
(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.
(4) Information Management Systems, Inc. (IMS) is a wholly owned subsidiary of
the Company.
<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, 1997 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 OPTIONS AT YEAR END YEAR END (1)
ACQUIRED ON VALUE -------------------------- -------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- --------- ------------- --------- ----------- ------------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
Ken F.
Parsons.. 1574 $ 29,261 69,384 101,005 1,040,108 $ 725,623
</TABLE>
(1) On December 31, 1997, the estimated market price of the Common Stock was
$24.50. 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.
<PAGE>
EMPLOYEE COMPENSATION PLANS
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 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,
1997, options covering 318,142 shares were granted and unexercised under the
plan. Options for 32,764 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
granted in accordance with the plan 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.
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 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.
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. Investment of employee contributions to the KSOP are directed by the
employee into a combination the Company's Common Stock and a number of mutual
and money market funds. The investment of Company 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.
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, 1997 and 1996
were $320,000 and $191,000, respectively.
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
meets earnings and growth objectives and are determined as a percentage of the
participant's base salary.
<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, 1997 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. The number of
shares beneficially owned by each stockholder is determined according to the
rules of the Securities and Exchange Commission ("SEC"), and the information is
not necessarily indicative of beneficial ownership for any other purpose. These
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, several persons may be deemed to be the "beneficial owners" of
the same shares, which in certain instances results in duplication in the
numbers and percentages reported in the table.
<TABLE>
<CAPTION>
NAME, ADDRESS AND NUMBER OF SHARES PERCENT OF CLASS
RELATIONSHIP WITH BENEFICIALLY BENEFICIALLY
FCFG * OWNED OWNED
------------------- ----------------- -----------------
<S> <C> <C>
E. Paul DeTray 139,743(1) 7.00%
Director of FCFG
Ken F. Parsons 195,148(2) 9.78%
President and CEO
of FCFG
James F. Arneson 59,036(3) 0.49%
Executive Vice
President and CFO
of FCFG and the
Bank
FCFG Employee Stock 454,867(4) 22.80%
Ownership Plan
("KSOP")
Directors and 630,704(5) 31.61%
Executive Officers
as a group (15)
* The address for all individuals is the same address as
the Company
</TABLE>
(FCFG) knows of no arrangements, the operation of which may at a subsequent date
result in a change of control of FCFG.
- ------------------------
(1) Includes 48,126 shares held jointly with spouse; 17,860 shares held by
DeTray's Quality Homes; 7,507 held by the DeTray Family Partnership; 48,241
unallocated shares held by the KSOP, considered beneficially owned by Mr.
DeTray as Trustee for the KSOP; and 11,148 shares which could be acquired
within 60 days by the exercise of stock options.
(2) Includes 54,519 shares held jointly with spouse; 14,427 and 1,600 held in
IRA accounts for the benefit of Mr. Parsons; 665 shares representing Mr.
Parsons ownership in an investment partnership; 1,011 shares held in an IRA
for the benefit of Mrs. Parsons; 5,301 shares held in the KSOP for the
benefit of Mr. Parsons; 48,241 unallocated shares held by the KSOP,
considered beneficially owned by Mr. Parsons as trustee for the KSOP; and
69,384 shares which could be acquired within 60 days by the exercise of
stock options.
(3) Includes 899 shares held in the KSOP for the benefit of Mr. Arneson; 48,241
unallocated shares held by the KSOP, considered beneficially owned by Mr.
Arneson as trustee for the KSOP; and 9,724 shares which could be acquired
within 60 days by the exercise of stock options.
(4) In addition to the 48,241 unallocated shares held by the KSOP, includes
139,743, 195,148, 91,833, and 59,036 beneficially owned by Messrs. DeTray,
Parsons, Panowicz and Arneson, respectively, solely as trustees of the KSOP,
over which the KSOP disclaims beneficial ownership.
(5) Includes 48,241 unallocated shares held by the KSOP which are considered
beneficially owned by Messrs. DeTray, Parsons, Panowicz and Arneson. Also
includes options for 201,278 shares owned by directors and management, which
are exercisable within 60 days of December 31, 1997.
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During 1997 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 terms of the agreement were unanimously approved by FCFG's Board at its
meeting on the same date. Mr. Price did not participate in the Board's
consideration of the Stock Purchase Agreement. The transactions contemplated by
the Stock Purchase Agreement were consummated on March 7, 1997 and October 30,
1997 as described below.
Under the terms of the Stock Purchase Agreement, on March 7, 1997 FCFG
purchased 122,570 shares of FCFG Common Stock held by the Selling
Shareholders ("Shares") at $20.50 per share. The aggregate purchase price for
the Shares was $2,512,685. Under the terms of the Stock Purchase Agreement,
FCFG also agreed to purchase certain options to acquire FCFG Common Stock
("Options") owned by Messrs. Byrne and Coleman. The Options were to be
acquired by FCFG in January, 1998 at an aggregate price of $1,132,940 which
was determined by deducting the exercise prices applicable to the Options
from the price of $22.00 per share. On April 15, 1997 the Stock Purchase
Agreement was amended to require the Options to be purchased on or before
October 30, 1997.
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 (9.25% at December 31, 1997). 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, 1997, the amount outstanding under this
obligation was $122,035.
SETTLEMENT AGREEMENT. In August, 1997, FCFG and the Bank entered into a
Settlement Agreement with Michael D. Edwards and Marieke G. Edwards. Mr. Edwards
is the former President of Prairie Security Bank, Yelm, Washington, which merged
with and into the Bank on February 7, 1997. Under his former Employment
Agreement with the Bank, Mr. Edwards served as the Bank's President from
February 7, 1997 through July 18, 1997. He also served on the Boards of
Directors of FCFG and the Bank. Under the Settlement Agreement, the parties
agreed to terminate Mr. Edwards' Employment Agreement with the Bank and to
settle all other issues regarding Mr. Edwards' relationship with FCFG and the
Bank.
Pursuant to the Settlement Agreement, the Bank paid Mr. Edwards $160,000 and
agreed to make payments to Mr. Edwards, for the period from August 1, 1997 to
December 31, 2001, totaling $7,141.14 per month. In addition, the Bank agreed to
purchase from Mr. Edwards an aggregate of 3,949 shares of FCFG Common Stock,
with such purchase to occur between February 10, 1998 and July 1, 1998. Among
other things, the Settlement Agreement also provides that the deadline for the
exercise of vested options to purchase shares of FCFG Common Stock held by Mr.
Edwards would be extended to July 1, 1999 and that all unvested options held by
Mr. Edwards would be canceled.
<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, 1997. Representatives of Knight, Vale & Gregory,
Inc., P.S. are expected to be present at the annual meeting.
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. This analysis compares 1997 results and financial position
with that of 1996.
FORWARD-LOOKING INFORMATION
Statements appearing in this report which are not historical in nature,
including the discussions of the effects of recent mergers and the adequacy
of the Company's capital resources, are forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements are subject to the risks and uncertainties that
may cause actual future results to differ materially. Readers are cautioned
not to place undue reliance on these forward-looking statements, which speak
only as of the date of this Annual Report. FCFG does not undertake any
obligation to publicly release any revisions to forward-looking statements
contained in this Annual Report to reflect any revisions to forward-looking
statements contained in this Annual Report to reflect events or circumstances
after the date of this Annual Report or to reflect the occurrence of
unanticipated events.
Such risks and uncertainties with respect to the Company include those related
to the economic environment, particularly in the region in which the Company
operates, competitive products and pricing, fiscal and monetary policies of the
federal government, changes in government regulations affecting financial
institutions, including regulatory fees and capital requirements, changes in
prevailing interest rates, acquisitions and the integration of acquired
businesses, credit risk management and asset/liability management, the financial
and securities markets, and the availability of and costs associated with
sources of liquidity.
PERFORMANCE OVERVIEW
In 1997 the Company achieved asset growth of 67%, or $117,973,000. First
Community Bank has continued to expand its market presence through strategic
acquisitions. During the year, the Company completed two acquisitions, which
added a total of $90,534,000 to total assets. The balance of the year's growth,
$27,439,000, was the result of further development of the Bank's customer base
and the opening of a new branch in Lacey, Washington.
<PAGE>
On February 7, 1997, the Company completed the acquisition of Prairie Security
Bank ("PSB") in a business combination accounted for as a purchase. PSB was a
state chartered bank headquartered in Yelm, Washington and had three branches
and $47,334,000 in total assets.
On July 18, 1997 the Bank completed the acquisition of four branches from Wells
Fargo Bank. The acquisition included $43,200,000 in deposits and includes branch
facilities in Hoquiam, Montesano, Toledo and Winlock, Washington.
Net income in 1997 was $719,000, which was down from $1,861,000 in 1996. Return
on average assets was .29% and 1.08% in 1997 and 1996, respectively. Return on
average equity also declined to 2.76% from 9.30% in 1996. Basic earnings per
share for 1997 were $0.38 versus $1.06 for 1996. The 1997 period includes
significant charges related to the Company's merger activity. Additionally, as a
result of the repurchase of stock options, which are more fully discussed in
"Certain Relationships and Related Transactions", a charge of $1,133,000 to
noninterest expenses was recorded.
The accompanying "Summary of Operations Analysis" is presented as a supplement
to the consolidated statement of income. This table should not be viewed as a
substitute for the generally accepted accounting principle-based financial
statements presented elsewhere in this report. Management believes that the
analysis is meaningful to understand the results and trends in operating income
separately from nonrecurring transactions, noncore activities and certain
provisions. There are three primary differences between the consolidated
statement of income and the operating income analysis. First, the line items are
presented in a slightly different order. Second, certain transactions that are
nonrecurring or that are not related to what management believes is core
business are not included in noninterest income and noninterest expenses in
determining operating income. Finally, operating income is income before the
provision for credit losses, noncore items and income taxes. The provision for
credit losses is deducted from operating income as its amount is based on the
analysis of the required level of the allowance for possible credit losses and
can be subject to fluctuation due to the prevailing level of charge-offs. Due to
the format of this presentation, the line items may not agree directly to the
Consolidated Financial Statements. For detailed information on the items
presented as noncore, refer to the respective discussions of "Noninterest
Income" and "Noninterest Expenses".
SUMMARY OF OPERATIONS ANALYSIS
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
(thousands)
Net interest income......................................... $ 13,121 $ 9,622
Noninterest income.......................................... 3,293 2,049
Noninterest expenses........................................ (13,216) (8,606)
---------- ----------
Operating income............................................ 3,198 3,065
Provision for credit losses................................. (1,015) (261)
Noncore items
Merger and integration costs.............................. (968) --
Asset write-down.......................................... (140) (225)
Repurchase of stock options............................... (1,133) --
Life insurance income..................................... 1,110 --
Officer survivor benefits................................. (379) --
Other..................................................... (187) --
---------- ----------
(1,697) (225)
Income before income taxes.................................. 486 2,579
---------- ----------
Provision for income taxes.................................. 233 (718)
---------- ----------
Net income.................................................. $ 719 $ 1,861
---------- ----------
---------- ----------
</TABLE>
<PAGE>
Operating income for 1997 increased $133,000 or four percent from 1996.
Highlights for the period include:
- Net interest income increased $3,499,000, or 36%. The growth in net
interest income was primarily the result of asset growth.
- Noninterest income increased $1,244,000, or 61% over 1996. The increase
reflected the growth in service charges on deposit accounts, origination
of mortgage loans and other fee income.
- Noninterest expenses increased $4,610,000, or 54%. This was the result of
the costs associated with having a substantially larger branch structure
in 1997, including facilities and personnel costs.
- The higher provision for possible credit losses in 1997 reflected the
impact of the integration of the loan portfolios of Prairie Security
Bank in 1997 and of Northwest Community Bank, which was acquired in
late-1995. These acquisitions also reflected an increase in the
percentage of net charge-offs as a percentage of total loans. The ratio
of nonperforming assets to total loans and foreclosed assets remained
steady from 2.36% in 1996 to 2.36% in 1997.
RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income in 1997 increased by $3,499,000, or 36%, from 1996. The net
interest margin, following the general decline in rates experienced in our
economy, decreased 27 basis points from 6.25% to 5.98%.
Total interest income increased by $5,882,000 over 1996 to $21,160,000.
Increased volumes as a result of asset growth accounted for $6,077,000 of the
increase while the growth in interest income was mitigated somewhat by the
general reduction in interest rates earned. The earnings impact of the growth
in average loan balances, which comprised 82% of average earning assets in
1997, far exceeded the impact of declining yields. The growth in investment
securities contributed $786,000 to the increase in interest income in 1997.
Of this increase, $702,000 resulted from the increased volume in securities,
and $84,000 resulted from a higher yield obtained on the portfolio. The
investment portfolio growth of 89% provided the opportunity to increase the
average yield by diversifying into higher yielding instruments. Interest
expense in 1997 increased $2,383,000 over 1996. The average volume of
interest bearing deposits increased 48% during the year. This had the effect
of raising interest expense by $2,539,000, however a reduction in interest
rates paid during the period served to counteract the volume increases by
$156,000. The effective rate paid on deposits and borrowed funds declined by
17 basis points to 4.32%.
An analysis of the change in net interest income is as follows (thousands):
<TABLE>
<CAPTION>
1997 COMPARED TO 1996 1996 COMPARED TO 1995
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.................. $ 5,064 $ (260) $ 4,804 $ 943 $ (330) $ 613
Federal funds sold and
deposits in banks.... 311 (19) 292 (416) (9) (425)
Investment
securities........... 702 84 786 (165) 24 (141)
Total interest
income........... 6,077 (195) 5,882 362 (315) 47
Interest paid on:
Savings, NOW and MMA... 931 (128) 803 (131) (87) (218)
Time deposits.......... 1,545 (10) 1,535 351 (46) 305
Other borrowings....... 63 (18) 45 (31) 15 (16)
Total Interest
expense.......... 2,539 (156) 2,383 189 (118) 71
Net interest
income........... 3,538 (39) 3,499 $ 173 $ (197) $ (24)
</TABLE>
<PAGE>
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.
Average consolidated statements of financial position and analysis of net
interest spread were as follows (dollars in thousands):
<TABLE>
<CAPTION>
1997 1996
----------------------------- -----------------------------
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).................................................. $ 179 $ 18,821 10.49% $131,185 $ 14,017 10.68%
Federal funds sold and interest bearing deposits in
banks.................................................... 15,484 836 5.40% 9,735 544 5.59%
Investment securities...................................... 24,605 1,503 6.11% 13,005 717 5.51%
Total earning assets and interest income....................... 219,484 21,160 9.64% 153,925 15,278 9.93%
-------- --------- -------- ---------
Other Assets:
Cash and due from banks.................................... 10,907 9,150
Bank premises and equipment................................ 10,173 7,480
Other assets............................................... 11,725 3,645
Allowance for credit losses................................ (1,954) (1,417)
Total Assets................................................... $250,337 $172,779
-------- --------
-------- --------
Liabilities and Stockholders' Equity
Interest bearing liabilities:
Deposits:
Savings, NOW, and Money Market Deposits................ $ 91,220 (2,584) 2.83% $ 58,616 1,781 3.04%
Time deposits.......................................... 93,454 (5,300) 5.67% 66,201 (3,765) 5.69%
-------- --------- -------- ---------
Total interest bearing deposits................................ $184,675 (7,884) 4.27% $124,817 (5,546) 4.44%
Other borrowings............................................... 1,865 (155) 8.35% 1,137 (110) 9.67%
-------- --------- -------- ---------
Total interest bearing liabilities and interest expense........ 186,540 (8,039) 4.32% 125,954 (5,656) 4.49%
-------- --------- -------- ---------
Non-interest bearing deposits.................................. 35,685 26,320
Other liabilities.............................................. 2,076 490
Stockholders' equity........................................... 26,036 20,015
-------- --------
Total liabilities, stockholders' equity and net interest
income....................................................... $250,337 $ 13,121 $172,779 $ 9,622
-------- --------- -------- ---------
-------- --------- -------- ---------
Net interest income as a percentage of average earning assets:
Interest Income............................................ 9.64% 9.93%
Interest Expense........................................... 3.66% 3.68%
--------- ---------
--------- ---------
Net Interest Income............................................ 5.98% 6.25%
--------- ---------
--------- ---------
</TABLE>
(1) For purposes of these computations, non-accrual loans are included in the
average loan balance outstanding. Loan fees and late charges of
$1,991,000 and $1,444,000 are included in interest income in 1997 and 1996.
<PAGE>
NON-INTEREST INCOME
Total non-interest income, excluding noncore items increased by $1,244,000 or
61% to $3,293,000 over the 1996 amount of $2,049,000. Service charges on deposit
accounts increased $505,000 or 46% to $1,610,000. This rate of increase
correlates with the deposit growth experienced during the year. Increased
origination fees on mortgage loans of $307,000 or 69% reflects the business
generated from an expanded branch network.
NONCORE NONINTEREST INCOME ITEMS
The Bank is the beneficiary of life insurance policies on certain officers in
connection with the Executive Supplemental Income Plan. During the year the Bank
received insurance proceeds of $1,419,000 as a result of the death of an
officer. Other income of $1,110,000 was recorded as the amount of proceeds
received in excess of the cash surrender value of the policy.
In connection with the acquisition of Northwest Community Bank in late 1995, the
Bank is a limited partner in certain limited partnerships which own and operate
low income housing projects. In accounting for these investments on the equity
method as prescribed by generally accepted accounting principles, the book value
of the partnerships was written down $225,000 and $140,000 in 1996 and 1997,
respectively, due to operating losses in the partnerships. The remaining book
value of approximately $36,000 is expected to be written down in 1998. These
partnerships were intended as tax shelter vehicles to provide tax credits and
tax losses in the near term in anticipation of future benefits at the time of
sale of the property. First Community Financial Group does not make it a
practice to invest in such partnerships and considers these to be noncore in
nature.
NON-INTEREST EXPENSE
Non-interest expense excluding noncore items increased to $13,216,000 from
$8,606,000 in 1996, an increase of 54%. General operating expenses increased in
response to the Company's growth--a 60% growth in the number of branch offices,
from 10 to 16, and asset growth of 67%. With the acquisitions came additional
staffing costs, facilities costs and operational expenses associated with the
combination of two entities and branch acquisitions. The ratio of non-interest
expense excluding noncore items as a percent of average total assets for the
year increased from 4.98% in 1996 to 5.28% in 1997.
NONCORE NONINTEREST EXPENSE ITEMS
In connection with the acquisition of Prairie Security Bank and the four Wells
Fargo Bank branches, merger and integration costs of $968,000 were incurred in
1997. These costs were incurred primarily for employee severance, professional
fees, costs to eliminate redundant computer systems, administrative functions
and premises and equipment. Included in this amount is $207,000 of goodwill
amortization from the Prairie Security Bank acquisition and $83,000 of core
deposit premium amortization from the Wells Fargo Bank branch acquisition.
As more fully disclosed in this document under the section "Certain
Relationships and Related Transactions", the repurchase of stock options from
two former executives of Northwest Community Bank necessitated the recognition
of $1,133,000 in compensation and related settlement costs.
In connection with the Bank's Executive Supplemental Income plan of which John
R. Johnson, Sr. was a participant, the Bank recognized costs for survivor
benefits and related costs upon his death in the amount of $379,000.
<PAGE>
In the course of conducting certain internal audit procedures, the Bank
discovered that two long-time, trusted employees had been embezzling funds in
unrelated schemes. Following an extensive investigation by the Bank, the
Company's bonding company, Federal law enforcement agencies and the Company's
external auditors, payment under the bond covering the amounts embezzled and
certain investigation costs was received by the Bank in December 1997. The
individuals involved have been dismissed by the Bank. One of the individuals
has been convicted and is serving a prison sentence, and criminal charges are
pending against the other individual. Costs associated with the investigation
and related claim against the Company's bond are included in "other noncore
items" in the table below.
<TABLE>
<CAPTION>
CHANGE
------------------------
1997 1996 AMOUNT PERCENT
--------- --------- --------- -------------
<S> <C> <C> <C> <C>
(Thousands)
NONINTEREST EXPENSES
Salaries and benefits..................... $ 7,551 $ 4,544 $ 3,007 66
Occupancy................................. 807 618 189 31
Equipment................................. 1,305 835 470 56
Other..................................... 3,553 2,609 944 36
--
--------- --------- ---------
13,216 8,606 4,610 54
NONCORE EXPENSE ITEMS
Merger and integration costs.............. 968 --
Officer survivor benefits................. 379 --
Repurchase of stock options............... 1,133 --
Other..................................... 187 --
--------- ---------
2,667 --
$ 15,883 $ 8,606
</TABLE>
FINANCIAL CONDITION
OVERVIEW
Consolidated total assets increased 67% to $294,474,000. This is due in large
part to the Company's acquisition of Prairie Security Bank (PSB), effective
February 7, 1997 and the acquisition of deposits and fixed assets of four Wells
Fargo Bank branches. The total assets acquired in these transactions were
$87,587,000 ($47,334,000 and $40,253,000 respectively). In addition to the
acquired assets, a recognition of goodwill in the amount of $4,971,000 from the
PSB acquisition and core deposit premium from the Wells Fargo branch acquisition
in the amount of $2,913,000, is included in the December 31, 1997 total assets.
Total assets, excluding those added due to acquisition, still experienced a 13%
growth over the level at December 31, 1996.
Total deposit growth in 1997 amounted to $109,687,000, increasing deposits to
$263,121,000, up 71% from $153,434,000 at December 31, 1996. The acquisition of
Prairie Security Bank accounted for $40,176,000 of the increase while the Wells
Fargo branch acquisition provided $43,200,000. The total deposit increase, net
of those added by acquisition, represents a 17% increase.
Loan balances in aggregate, net of loan loss reserve, increased by $67,105,000,
or 52%, to $197,043,000. The Prairie Security Bank transaction provided a net
increase of $36,923,000. Excluding this acquisition related increase, loan
balances increased $30,182,000 or 23%. The loan to deposit ratio has decreased
during the year from 85% to 74%. This decrease is directly the result of the
influx of deposits from the Wells Fargo branch acquisition. The loan to deposit
ratio is expected to rise over time to previously experienced levels as the
opportunity to loan the acquired deposits persists.
<PAGE>
INVESTMENTS
The Company's investment portfolio increased 298% to $42,617,000. The
significant increase in these assets is primarily related to the Wells Fargo
branch acquisition. While this acquisition provided deposits, no loans were
included in the purchase. These funds have been placed into marketable
securities to provide current income, and liquidity. Included in the
portfolio are securities classified as "held-to-maturity", which are recorded
at an amortized cost of $959,000, as well as securities classified as
"available-for-sale", which are recorded at their fair value of $41,658,000.
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.
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, 1997
Equity securities............... $ 2,709 $ -- $ -- $ 2,709
U.S. Government and agency
securities.................... 22,042 98 26 22,114
Corporate securities............ 4,657 4 2 4,659
Mortgage backed securities...... 8,649 8 32 8,625
State and municipal
securities.................... 3,498 54 1 3,551
$ 41,555 $ 164 $ 61 $ 41,658
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
Held-to-Maturity Securities
December 31, 1997
State and municipal
securities.................... $ 959 $ 67 $ 2 $ 1,024
$ 959 $ 67 $ 2 $ 1,024
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
</TABLE>
<PAGE>
The stated maturities of debt securities were as follows (dollars in thousands):
<TABLE>
<CAPTION>
HELD-TO-MATURITY SECURITIES AVAILABLE-FOR-SALE SECURITIES
-------------------------------- --------------------------------
ESTIMATED WEIGHTED ESTIMATED 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..................................... $261 $ 265 4.71% $ 6,131 $ 6,127 5.77%
Due after one year through five years....................... 170 182 5.41% 9,710 9,723 6.16%
Due after five years through ten years...................... 528 577 5.72% 11,804 11,903 6.92%
Due after 10 years.......................................... -- -- -- 11,201 11,196 6.49%
$959 $1,024 $38,846 $38,949
</TABLE>
Mortgage backed securities are allocated based on their anticipated principal
repayment.
LOANS
Loan balances increased by 49% to $194,861,000 from $130,632,000 in 1996. This
increase was the result of $36,923,000 from Prairie Security Bank and
$27,306,000 generated through the banks expanded branch network.
During 1997 the loan to deposit ratio decreased to 74% from 85% in 1996. This is
a result of the acquisition of a large increase in deposit balance without a
corresponding increase in loan balances. The Wells Fargo Bank branch purchases
provided $43,200,000 in deposits with no loan portfolio. As these funds continue
to be lent, this ratio is expected to return to historical levels which will
result in a corresponding increase in net interest income.
The composition of the loan portfolio was as follows at December 31 (dollars in
thousands):
<TABLE>
<CAPTION>
1997 % OF 1996 % OF
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Commercial....................... $ 36,995 19.0 % $ 27,353 20.9 %
Real estate construction......... 24,423 12.5 % 14,071 10.8 %
Real estate mortgage............. 124,954 64.1 % 83,242 63.7 %
Consumer......................... 8,489 4.4 % 5,966 4.6 %
$ 194,861 100.00% $ 130,632 100.00%
</TABLE>
The Bank's loan portfolio is concentrated in real estate secured loans, which
comprise 76.7% of the portfolio in 1997. This percentage increased from 74.5% in
1996.
<PAGE>
The following table shows the maturity analysis of commercial and real estate
construction loans outstanding as of December 31, 1997 (dollars in thousands):
<TABLE>
<CAPTION>
AFTER ONE
WITHIN BUT WITHIN AFTER
ONE YEAR FIVE YEARS FIVE YEARS TOTAL
--------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
Commercial............................ $ 17,607 $ 13,714 $ 5,674 $ 36,995
Real estate construction.............. 20,203 3,741 479 24,423
$ 37,810 $ 17,455 $ 6,153 $ 61,418
</TABLE>
Of these loans maturing after one year, $14,073,000 have predetermined, or fixed
interest rates and $9,535,000 have floating or adjustable interest rates.
DEPOSITS
Total deposits increased by $109,687,000, or 71% over 1996 to $263,121,000. The
relative proportion of the demand deposits and savings accounts increased by 5
percentage points, while the percentage of time deposits to total deposits
declined by a like amount. Since the average cost of time deposit accounts is
289 basis points higher than interest bearing demand accounts, this shift in
deposit mix serves to decrease the Bank's cost of funds.
The Bank's deposits at December 31 are summarized as follows (dollars in
thousands):
<TABLE>
<CAPTION>
1997 1996
---------------------------------- ----------------------------------
AMOUNT PERCENT RATE AMOUNT PERCENT RATE
---------- ----------- --------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Demand Deposits............... $ 43,245 16.4 $ 24,719 16.1
Interest bearing demand....... 85,740 32.6 2.78% 42,541 27.7 3.09%
Savings Accounts.............. 26,743 10.2 2.92% 16,235 10.6 2.91%
Other time deposits........... 107,393 40.8 5.67% 69,939 45.6 5.69%
TOTAL..................... $ 263,121 100.0 $ 153,434 100.0
</TABLE>
Certificates of deposit at December 31, 1997 are scheduled to mature as follows
(dollars in thousands):
<TABLE>
<CAPTION>
UNDER $100,000
$100,000 AND OVER TOTAL
---------- ---------- ----------
<S> <C> <C> <C>
0-90 days...................................... $19,665 $ 6,233 $ 25,898
91-180 days.................................... 16,914 4,028 20,942
181-365 days................................... 41,571 10,836 52,407
Over 1 year.................................... 6,898 1,248 8,146
$85,048 $ 22,345 $ 107,393
</TABLE>
ASSET QUALITY
Nonperforming assets consist of loans on which interest is no longer accrued,
accruing loans past due 90 days or more and foreclosed real estate and other
assets. Total nonperforming assets increased 65% from $4,216,000 at December 31,
1996 to $6,937,000 at year-end 1997. The largest component of this increase was
in nonaccrual loans, of which approximately 65% of the $2,483,000 increase
resulted from loans acquired from PSB early in 1997 and from NCB late in 1995.
Liquidation plans are in place for these loans, most of which will include
foreclosure followed by a subsequent sale of the subject collateral. Any
anticipated losses on these loans have been fully reserved for in the allowance
for credit losses.
<PAGE>
Foreclosed real estate is carried at the lower of the Bank's cost or the
estimated net realizable value upon sale. The balance of foreclosed real estate
increased $1,042,000 during the year. Of this increase, $477,000 was the result
of several residential real estate construction loans made by PSB prior to the
merger on properties located outside of PSB's or the Bank's market areas.
Construction of these projects is being completed and the properties are being
actively marketed. Of the total foreclosed real estate balance of $2,105,000,
properties with a carrying value of $1,412,000, or 67% of the total have been
sold and are pending closing as of the filing of this report.
Nonperforming assets were as follows at December 31 (dollars in thousands):
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Non-accrual loans................................................ $ 4,381 $ 1,898
Accruing loans past due 90 days or more.......................... 319 1,238
Foreclosed real estate........................................... 2,105 1,063
Other assets..................................................... 132 17
$ 6,937 $ 4,216
</TABLE>
The gross interest income that would have been recorded in 1997 if the loans had
been current in accordance with their original terms and had been outstanding
throughout the period or since origination, if held for part of the period
amounts to $330,000. No interest income on those loans was included in net
income for 1997.
The Company is not aware of any loans continuing to accrue interest at December
31, 1997 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.
<PAGE>
Transactions in the allowance for credit losses for the years ended December 31,
1997 and 1996 are as follows (dollars in thousands):
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Balance at beginning of year..................................... $ 1,420 $ 1,376
Provision charged to non-interest expense........................ 1,015 261
Transfer from Prairie Security Bank.............................. 469 --
Losses charged to allowance
Commercial..................................................... 627 34
Real Estate Mortgage........................................... 69 116
Consumer....................................................... 111 77
(807) (227)
Recoveries credited to allowance................................. 25 10
Net charge-offs................................................ (782) (217)
Balance at end of year........................................... $ 2,122 $ 1,420
Ratio of net charge-offs to Average Loans Outstanding.......... .44% .17%
</TABLE>
The balance of loans charged off increased from $207,000 in 1996 to $807,000 in
1997. Of the loans charged off in 1997, $278,000 resulted from several loans
acquired from PSB and NCB, and $282,000 resulted from one loan which involved a
customer's misapplication of proceeds from the Bank's purchase of accounts
receivable. As a result of the increased level of charge offs and non-performing
loans, as well as the growth in the loan portfolio, the provision for credit
losses increased from $261,000 in 1996 to $1,015,000 in 1997.
In May 1993, the Financial Accounting Standards Board (FASB) issued SFAS No.
114, "Accounting by Creditors for Impairment of a Loan" and in October 1996,
issued SFAS No. 118, "Accounting by Creditors for Impairment of a Loan--Income
Recognition Disclosures, an amendment to SFAS No. 114". The Company measures
impaired loans based on the present value of expected future cash flows
discounted at the loan's effective interest rate or, as a practical expedient,
at the loan's observable market price or the fair market value of the collateral
if the loan is collateral dependent. The Company excludes loans that are
currently measured at fair value or at lower of cost or fair value, and certain
large groups of smaller balance homogeneous loans that are collectively measured
for impairment. At December 31, 1997 and 1996, the Company's recorded investment
in certain loans that were considered to be impaired was $4,381,000 and
$1,898,000, respectively, all of which was classified as nonperforming. Of these
impaired loans, $992,000 and $1,493,000 had a related valuation allowance of
$139,000 and $132,000. No allocation of the allowance for credit losses was
considered necessary for the remaining impaired loans. The balance of the
allowance for credit losses in excess of these specific reserves is available to
absorb losses from all loans.
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.
<PAGE>
In the following table, the allowance for possible credit losses at December 31,
1997 and 1996 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>
<CAPTION>
1997 1996
------------------------ ------------------------
% OF TOTAL % OF TOTAL
ALLOWANCE LOANS ALLOWANCE LOANS
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Commercial Loans..................... $ 678 19.0% $ 412 20.9%
Real Estate Loans.................... 1,200 76.6% 887 74.5%
Consumer Loans....................... 244 4.4% 121 4.6%
TOTAL ALLOWANCE.................. $ 2,122 100.0% $ 1,420 100.0%
</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/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
securities, particularly those of shorter maturity, and are the principal source
of asset liquidity. At December 31, 1997, cash, deposits in banks, Federal funds
sold and securities available for sale totaled $69,926,000. 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 December 31, 1997, overnight and
federal funds borrowing lines of credit totaled $17,724,000 and was used
sparingly during 1997. Usage of this facility was almost exclusively in the
months prior to the Wells Fargo branch acquisition when the large inflow of
deposits was realized. The Bank also has preestablished term borrowing lines
available with the Federal Home Loan Bank of approximately $14,724,000. This
credit facility has remained unused in 1997.
Management believes the Bank's liquidity position at December 31, 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.
<PAGE>
INTEREST RATE GAP ANALYSIS
DECEMBER 31, 1997
<TABLE>
<CAPTION>
AFTER ONE
WITHIN BUT WITHIN AFTER
ONE YEAR FIVE YEARS FIVE YEARS TOTAL
---------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
(dollars in thousands)
Loans.............................. $ 98,539 $ 81,091 $ 15,154 $ 194,784
Securities:
Available for sale............... 6,131 9,710 23,005 38,846
Held to maturity................. 261 170 528 959
Interest bearing deposits with
banks............................ 5,648 -- -- 5,648
Federal funds sold................. 11,000 -- -- 11,000
Total Earning Assets............. 121,579 90,971 38,687 251,237
Deposits:
Savings, NOW and money market.... 12,483 -- -- 112,483
Time certificates of deposit..... 99,127 8,266 -- 107,393
Long-term borrowings............... 3,818 -- -- 3,818
Total Interest Bearing
Liabilities.................... 215,428 8,266 -- 223,694
Net Interest Rate Sensitivity
Gap............................ $ (93,849) $ 82,705 $ 38,687 $ 27,543
</TABLE>
CAPITAL
Consolidated capital of FCFG increased $5,246,000 in aggregate during 1997. In
addition to net earnings of $719,000, significant changes to capital included
the effects of the purchase of Prairie Security Bank, which increased capital by
$7,469,000, and the repurchase of certain shares of the Company. As more fully
described in this document under the heading "Certain Relationships and Related
Transactions", 122,570 shares of stock were repurchased by the Company at a cost
of $2,512,000, which reduced capital by this amount.
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
December 31, 1997, the Company's leverage ratio was 6.58%, 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 and the Wells Fargo branches. For
regulatory purposes, the associated goodwill and core deposit premium 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 and other intangible assets, 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
December 31, 1997, the Tier I capital ratio was 8.30%, and total capital was
9.22%.The similar ratios at December 31, 1996 were a Tier I capital ratio of
14.78% and a total capital ratio of 15.77%.
<PAGE>
The following table sets forth certain operating and capital ratios for the
Company at December 31:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Return on Average Assets................... .29% 1.08%
Return on Average Equity................... 2.76% 9.30%
Average Equity to Average Assets Ratio..... 10.40% 11.58%
</TABLE>
No cash dividends were paid in 1997 or 1996.
FUTURE OUTLOOK
The following statements are forward-looking and should be read in conjunction
with information contained in the section entitled "Forward-looking
Information".
Because of the rapid growth experienced in 1997, the Bank has surpassed its
current growth objectives and now has a physical presence in four counties
through a network of 16 branches. As detailed in this report, this growth
came at significant cost. Management's direction is now focused on the full
integration of recent acquisitions and achieving the associated economies and
improvement in earnings. Due to this focus on earnings, the growth of the
Bank's assets is expected to be significantly less than that experienced in
1997. Although the Company is not actively seeking additional acquisition
candidates, any such opportunities will be evaluated as they arise.
In order to continue to utilize the funds received in the Wells Fargo branch
acquisition, the Bank will focus on increasing the size of the loan
portfolio, while following prudent underwriting standards. Since it is
expected that a higher proportion of the Bank's earning assets will shift to
loans which produce significantly higher yields than other investments,
interest income is expected to increase. However, because interest rates
going into 1998 are at historically low levels, the Company expects the
average yield on the loan portfolio to decline somewhat in 1998. The quality
of the existing portfolio is expected to improve as collection and
liquidation plans are implemented for problem assets.
Based on changes in the Bank's branch network during 1997, certain branches are
being evaluated to determine if those customers can be served more effectively
and efficiently at other locations. Surplus properties which resulted from
branch consolidations and acquisitions are being sold.
Except for income from life insurance proceeds received in 1997, noninterest
income is expected to increase in 1998 due to higher levels of mortgage lending
resulting from the current low home mortgage rates. Service charge and related
income is also expected to increase over 1997, as a significant portion of the
Bank's deposit customers were gained in mid-1997 and were not with the bank for
all of the year.
Total noninterest expenses are expected to decrease from 1997 levels due to the
high level of noncore items in 1997. However, because of the 60% growth in the
number of branch locations in 1997, and that the costs associated with these
locations were not incurred for all of 1997, personnel and facility costs are
expected to increase in 1998.
YEAR 2000 ISSUES
The Company uses various automated systems and software programs to provide
banking products and services to its customers and to support the administration
of the Company. Many existing computer programs use only two digits to identify
a year and were not designed in consideration of functioning after the year
2000. If not corrected, these systems could fail or create erroneous results.
The Year 2000 issue affects virtually all companies and organizations that use
automated systems, or have business relations with those that do.
<PAGE>
The Company has undertaken to ensure that its data processing, communications
and other systems will not be adversely impacted by the year 2000 issue. The
project has been divided into five phases: Awareness, Assessment, Renovation,
Validation and Implementation.
The Company has completed the awareness phase, wherein the potential impacts of
the issue on the Company are identified. This includes identifying all software
and hardware systems as well as potential effects on the Bank's customers and
vendors. The assessment phase of the project has also been completed, wherein
each potential impact has been evaluated as to its risk, and an assessment has
been made as to the course of corrective action to be taken. Contingency plans
are also developed in this phase. The renovation and validation phases are
currently underway for various systems, and the Company expects to be completed
with the project prior to year-end 1999.
Since the Bank's data processing systems were not developed by the Company, but
were purchased from large reputable vendors in the financial services industry,
the cost to the Company of year 2000 compliance is not expected to be material.
Because the software used by the Bank is covered under software maintenance
agreements, the cost of reprogramming is borne by the vendors.
The Bank is also evaluating its current customer base to make an assessment of
the risk of the year 2000 issue on their ability to repay loans. The Bank will
develop risk mitigation plans for those customers who are assessed to have a
high level of year 2000 risk. For new loans, assessment of year 2000 risk is
included in underwriting considerations.
<PAGE>
INFORMATION CONCERNING SHAREHOLDER PROPOSALS
Proposals of shareholders intended to be presented at the Annual Meeting of
Shareholders of FCFG scheduled to be held May, 1999, must be received for
inclusion in the Proxy Statement and form of Proxy relating to that meeting by
December 2, 1998.
By Order of the Board of Directors
James F. Arneson
Secretary
Lacey, Washington
April 13, 1998
- -------------------------------------------------------------------------------
IMPORTANT: An affirmative vote of the holders of a majority of the shares
present in person or by proxy at the meeting 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.
and
Subsidiaries
CONSOLIDATED
FINANCIAL
REPORT
December 31
1997
<PAGE>
CONTENTS
<TABLE>
<S> <C>
Independent Auditors' 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 - F-6
Notes to Consolidated Financial Statements............. F-7 - F-28
</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, 1997 and 1996, and the
related consolidated statements of income, stockholders' equity and cash flows
for the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated 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 consolidated 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, 1997 and 1996, 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.
January 30, 1998
Tacoma, Washington
<PAGE>
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
First Community Financial Group, Inc. and Subsidiaries
December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Assets
Cash and due from banks................................... $ 11,620 $ 8,467
Interest bearing deposits in banks........................ 5,648 10,141
Federal funds sold........................................ 11,000 4,000
Securities available for sale............................. 41,658 7,513
Securities held to maturity (fair value 1997-$1,024,
1996-$3,249)............................................ 959 3,182
Loans held for sale....................................... 4,304 726
Loans..................................................... 194,861 130,632
Allowance for credit losses............................... (2,122) (1,420)
Net loans................................................. 192,739 129,212
Premises and equipment.................................... 10,683 7,593
Foreclosed real estate.................................... 2,105 1,063
Accrued interest receivable............................... 1,491 834
Cash value of life insurance.............................. 3,159 2,088
Goodwill.................................................. 7,884 --
Other assets.............................................. 1,224 1,682
Total assets.............................................. $ 294,474 $ 176,501
Liabilities
Deposits:
Demand.................................................. $ 43,245 $ 24,719
Savings and interest-bearing demand..................... 112,483 58,776
Time.................................................... 107,393 69,939
Total deposits............................................ 263,121 153,434
Long-term debt............................................ 3,818 1,294
Accrued interest payable.................................. 403 229
Other liabilities......................................... 967 625
Total liabilities......................................... 268,309 155,582
Commitments and Contingent Liabilities -- --
Stockholders' Equity
Preferred stock (no par value); 200,000 shares authorized,
none issued............................................. -- --
Common stock (par value $2.50); 10,000,000 shares
authorized, shares issued: 1,995,426 in 1997 and
1,698,505 in 1996....................................... 4,988 4,246
Surplus................................................... 20,459 13,745
Retained earnings......................................... 1,596 3,186
Net unrealized gain (loss) on securities available for
sale, net of tax of $35 and ($7)........................ 68 (13)
Unearned KSOP shares...................................... (946) (245)
Total stockholders' equity................................ 26,165 20,919
Total liabilities and stockholders' equity................ $ 294,474 $ 176,501
</TABLE>
See notes to consolidated financial statements.
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
First Community Financial Group, Inc. and Subsidiaries
Years Ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Interest Income
Loans....................................................... $ 18,821 $ 14,017
Federal funds sold and deposits in banks.................... 836 544
Investment securities:
Taxable................................................. 1,339 579
Non-taxable............................................. 164 138
Total interest income....................................... 21,160 15,278
Interest Expense
Deposits.................................................... 7,884 5,546
Other....................................................... 155 110
Total interest expense...................................... 8,039 5,656
Net interest income......................................... 13,121 9,622
Provision for Credit Losses................................... 1,015 261
Net interest income after provision for credit losses....... 12,106 9,361
Non-Interest Income
Service charges on deposit accounts......................... 1,610 1,105
Origination fees and gains on sales of loans................ 750 443
Life insurance proceeds..................................... 1,110 --
Other operating income...................................... 793 276
Total non-interest income................................... 4,263 1,824
Non-Interest Expenses
Salaries.................................................... 5,590 3,751
Employee benefits........................................... 1,961 793
Occupancy................................................... 807 618
Equipment................................................... 1,305 835
Repurchase of stock options................................. 1,133 --
Other non-interest expense.................................. 5,087 2,609
Total non-interest expenses................................. 15,883 8,606
Operating income before income taxes........................ 486 2,579
Income Tax (Benefit).......................................... (233) 718
Net income.................................................. $ 719 $ 1,861
Earnings Per Share Data
Basic earnings per share.................................... $ .38 $ 1.06
Diluted earnings per share.................................. .36 .98
</TABLE>
See notes to consolidated financial statements.
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
First Community Financial Group, Inc. and Subsidiaries
Years Ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
NET UNREALIZED
GAIN (LOSS) GUARANTEED
COMMON RETAINED ON SECURITIES KSOP
STOCK SURPLUS EARNINGS AVAILABLE FOR SALE OBLIGATION TOTAL
------ ------- -------- ------------------ ---------- -------
<S> <C> <C> <C> <C> <C> <C>
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...................................... 201 1,584 (1,796) -- -- (11)
Transfer to retained earnings.......................... -- (181) 181 -- -- --
Valuation adjustments, net of tax...................... -- -- -- 29 -- 29
Net increase in guaranteed KSOP obligation............. -- -- -- -- (245) (245)
Balance, December 31, 1996......................... 4,246 13,745 3,186 (13) (245) 20,919
Net income............................................. -- -- 719 -- -- 719
Stock options exercised................................ 44 159 -- -- -- 203
5% stock dividend...................................... 234 2,062 (2,309) -- -- (13)
Stock repurchased...................................... (306 ) (2,206) -- -- -- (2,512)
Valuation adjustments, net of tax...................... -- -- -- 81 -- 81
Stock issued for purchase of Prairie Security Bank..... 770 6,699 -- -- -- 7,469
Net increase in guaranteed KSOP obligation............. -- -- -- -- (701) (701)
Balance, December 31, 1997......................... $4,988 $20,459 $ 1,596 $ 68 ($946) $26,165
</TABLE>
See notes to consolidated financial statements.
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
First Community Financial Group, Inc. and Subsidiaries
Years Ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Cash Flows from Operating Activities
Net income................................................ $ 719 $ 1,861
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Provision for credit losses........................... 1,015 261
Depreciation and amortization......................... 1,231 772
Deferred income taxes................................. (225) 16
Stock dividends received.............................. (110) (81)
Amortization of goodwill.............................. 290 --
Life insurance proceeds............................... 1,419 --
Origination of loans held for sale.................... (38,029) (18,966)
Proceeds from sales of loans held for sale............ 34,451 19,718
(Increase) decrease in cash value of life insurance... 60 (438)
Gain on sale of foreclosed real estate................ (11) (41)
(Increase) decrease in accrued interest receivable.... (657) 151
Increase (decrease) in accrued interest payable....... 174 (112)
Other--net............................................ (675) (231)
Net cash provided by (used in) operating activities....... (348) 2,910
Cash Flows from Investing Activities
Net (increase) decrease in interest bearing deposits in
other banks............................................. 5,217 (1,250)
Net (increase) decrease in Federal funds sold............. (7,000) 1,841
Purchases of securities available for sale................ (44,652) (2,360)
Proceeds from maturities of securities held to maturity... 2,220 4,045
Proceeds from maturities of securities available for
sale.................................................... 15,164 2,093
Net increase in loans..................................... (28,795) (5,910)
Proceeds from sales of foreclosed assets.................. 258 572
Additions to premises and equipment....................... (2,324) (575)
Purchase of Prairie Security Bank, net of cash acquired... (880) --
Deposit premium paid on branches purchased................ (2,997) --
Other--net................................................ 293 33
Net cash used in investing activities..................... (63,496) (1,511)
Cash Flows from Financing Activities
Net increase (decrease) in deposits....................... 68,842 (2,737)
Proceeds from exercise of stock options................... 203 45
Proceeds from issuance of long-term debt.................. 2,750 --
Repayment of long-term debt............................... (2,170) (188)
Repurchase of common stock................................ (2,512) --
Payment for fractional shares............................. (13) (11)
Other..................................................... (103) --
Net cash provided by (used in) financing activities....... 66,997 (2,891)
Net change in cash and due from banks..................... 3,153 (1,492)
Cash and Due from Banks
Beginning of year......................................... 8,467 9,959
End of year............................................... $ 11,620 $ 8,467
</TABLE>
(continued)
See notes to consolidated financial statements.
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(concluded)(DOLLARS IN THOUSANDS)
First Community Financial Group, Inc. and Subsidiaries
Years Ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest.............................................. $ 7,865 $ 5,768
Income taxes.......................................... 320 805
Supplemental Disclosures of Non-Cash Investing and
Financing Activities
Foreclosed real estate acquired in settlement of loans.... $ 1,222 $ 1,708
Fair value adjustment of securities available for sale,
net..................................................... 81 29
Excess of cost over net assets acquired of Prairie
Security Bank........................................... (5,177) --
Net increase in guarantee of KSOP obligation.............. 701 245
Common stock issued for purchase of Prairie Security
Bank.................................................... 7,469 --
Stock dividends........................................... 2,296 1,785
</TABLE>
See notes to consolidated financial statements.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
First Community Financial Group, Inc. and Subsidiaries
December 31, 1997 and 1996
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
First Community Financial Group, Inc. (the Company) provides commercial banking
services in Washington State through 16 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.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of 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. All significant intercompany
transactions and balances have been eliminated.
FINANCIAL STATEMENT PRESENTATION
The financial statements have been prepared in accordance with generally
accepted accounting principles and practices within the banking industry. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, and disclosure of
contingent assets and liabilities, as of the date of the balance sheet, and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ significantly from those estimates.
Certain prior year amounts have been reclassified to conform to 1997
presentation.
SECURITIES AVAILABLE FOR SALE
Securities available for sale consist of debt securities, which may be sold to
implement the Company's asset/liability management strategies, and in response
to changes in interest rates and similar factors, and certain equity securities.
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.
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.
(continued)
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
First Community Financial Group, Inc. and Subsidiaries
December 31, 1997 and 1996
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
Generally 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 or when
they are past due 90 days as to either principal or interest. 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.
ALLOWANCE FOR CREDIT LOSSES
The allowance for credit losses is maintained at a level considered adequate to
provide for losses that can be reasonably anticipated. The allowance 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. This evaluation requires the use of
current estimates, which may vary from the ultimate collectibility experienced
in the future. The estimates used are reviewed periodically, and, as adjustments
become necessary, they are charged to operations in the period in which they
become known.
When management determines 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.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated depreciation, which
is computed on the 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.
(continued)
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
First Community Financial Group, Inc. and Subsidiaries
December 31, 1997 and 1996
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
GOODWILL
Goodwill represents costs in excess of net assets acquired (see Note 2), which
is amortized on a straight-line basis over a period of 15 to 25 years. The
Company periodically evaluates goodwill for impairment.
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 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.
STOCK-BASED COMPENSATION
The Company accounts for stock-based awards to employees and directors using the
intrinsic value method, in accordance with APB No. 25, Accounting for Stock
Issued to Employees. Accordingly, no compensation expense has been recognized in
the financial statements for employee and director stock arrangements. However,
the required pro forma disclosures have been provided in accordance with SFAS
No. 123, Accounting for Stock-Based Compensation.
FAIR VALUES OF FINANCIAL INSTRUMENTS
The following method and assumptions were used by the Company in estimating the
fair values of financial instruments 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.
(continued)
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
First Community Financial Group, Inc. and Subsidiaries
December 31, 1997 and 1996
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FAIR VALUES OF FINANCIAL INSTRUMENTS (CONCLUDED)
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.
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.
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. The
carrying amounts of variable rate debt approximate their fair value.
CASH EQUIVALENTS
The Company considers all amounts included in the balance sheets caption "Cash
and due from banks" to be cash equivalents.
EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, Earnings Per Share (SFAS No. 128), which
the Company adopted in the fourth quarter of 1997. SFAS No. 128 requires a dual
presentation of basic and diluted earnings per share. Basic earnings per share
exclude dilution and are computed by dividing net income by the weighted average
number of common shares outstanding. Diluted earnings per share reflect the
potential dilution that could occur if common shares were issued pursuant to the
exercise of options under the Company's stock option plans. Earnings per share
for 1996 have been restated to conform to the presentation required by SFAS No.
128.
(continued)
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
First Community Financial Group, Inc. and Subsidiaries
December 31, 1997 and 1996
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards Nos. 130, Reporting Comprehensive Income, and
131, Disclosures about Segments of an Enterprise and Related Information, both
of which are effective for years beginning after December 31, 1997. SFAS No. 130
establishes standards for reporting and display of comprehensive income and its
components in a full set of general-purpose financial statements. All items that
are required to be recognized under accounting standards as components of
comprehensive income will have to be reported in a financial statement that is
displayed with the same prominence as other financial statements. Also, the
accumulated balance of other comprehensive income will have to be displayed
separately from retained earnings and additional paid-in capital in the equity
section of the balance sheet. SFAS No. 131 requires that public enterprises
report financial and descriptive information about their reportable operating
segments. Both of these pronouncements will require additional disclosures about
the Company's operations, but are not anticipated to have any effect on
financial position or results of operations.
NOTE 2--ACQUISITIONS
The Company completed the acquisition of Prairie Security Bank (PSB) effective
February 7, 1997. PSB had three branches and was headquartered in Yelm,
Washington. The Company paid $2,319,000 in cash and issued 307,916 shares of
common stock totaling $7,469,000. The acquisition was treated as a purchase for
accounting purposes. Accordingly, the assets and liabilities of PSB have been
recorded on the books of the Company at their respective fair market values at
the effective date of the acquisition. Goodwill, the excess of the purchase
price (cost) over the net fair value of the assets and liabilities acquired, was
recorded at $5,177,000. Amortization of goodwill over a 25-year period will
result in a charge to earnings of approximately $207,000 per year. Because of
the amount of assets of PSB acquired by the Company, the financial results for
December 31, 1997, are not generally comparable to those of a year ago. The
combined organization at December 31, 1997, is significantly larger than it was
a year ago.
The accompanying financial statements include the operations of the two
institutions from February 7, 1997 to December 31, 1997. The following pro forma
information presents the results of operations for the years ended December 31,
1997 and 1996, as though the acquisition had occurred on January 1, 1996. The
pro forma results do not necessarily indicate the actual results that would have
been obtained, nor are they necessarily indicative of the future operations of
the combined companies. The unaudited pro forma results of operations were as
follows (dollars in thousands, except per share amounts):
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Interest income............................................... $ 21,689 $ 19,410
Interest expenses............................................. 8,206 7,287
Net interest income....................................... $ 13,483 $ 12,123
Net income................................................ $ 473 $ 1,826
Earnings per share:
Basic..................................................... $ .25 $ 1.04
Diluted................................................... .23 .96
</TABLE>
(continued)
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
First Community Financial Group, Inc. and Subsidiaries
December 31, 1997 and 1996
NOTE 2--ACQUISITIONS (CONTINUED)
WELLS FARGO BRANCHES
On July 18, 1997, the Bank closed on the purchase of four Wells Fargo Bank
branches. The purchase included deposits of approximately $43 million and branch
facilities in Hoquiam, Montesano, Toledo and Winlock. The assets and liabilities
acquired have been recorded on the books of the Company at their respective fair
market values at the effective date of the acquisition. Goodwill was recorded
for $2,997,000. Amortization of goodwill over a 15-year period will result in a
charge to earnings of approximately $200,000 per year.
NOTE 3--RESTRICTED ASSETS
Federal Reserve Board regulations require that the Bank maintain certain minimum
reserve balances on deposit with the Federal Reserve Bank. The amounts of such
balances for the years ended December 31, 1997 and 1996 were approximately
$2,895,000 and $970,000, 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>
Securities Available for Sale
December 31, 1997
U.S. Government and agency
securities...................... $ 22,042 $ 98 $ 26 $ 22,114
Equity securities................. 2,709 -- -- 2,709
Corporate securities.............. 4,657 4 2 4,659
Mortgage backed securities........ 8,649 8 32 8,625
State and municipal securities.... 3,498 54 1 3,551
$ 41,555 $ 164 $ 61 $ 41,658
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
</TABLE>
(continued)
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
First Community Financial Group, Inc. and Subsidiaries
December 31, 1997 and 1996
NOTE 4--DEBT AND EQUITY SECURITIES (CONCLUDED)
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Securities Held to Maturity
December 31, 1997
State and municipal securities.... $ 959 $ 67 $ 2 $ 1,024
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
</TABLE>
The scheduled maturities of debt securities held to maturity and available for
sale at December 31, 1997 were as follows (dollars in thousands):
<TABLE>
<CAPTION>
HELD TO MATURITY AVAILABLE FOR SALE
------------------------------------- -------------------------------------
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................... $ 261 $ 265 4.71% $ 6,131 $ 6,127 5.77%
Due after one year
through five years..... 170 182 5.41 9,710 9,723 6.16
Due after five years
through ten years...... 528 577 5.72 11,804 11,903 6.92
Due after ten years...... -- -- -- 11,201 11,196 6.49
$ 959 $ 1,024 $ 38,846 $ 38,949
</TABLE>
Securities carried at approximately $2,567,000 at December 31, 1997 and
$1,553,000 at December 31, 1996, were pledged to secure public deposits and for
other purposes required or permitted by law.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
First Community Financial Group, Inc. and Subsidiaries
December 31, 1997 and 1996
NOTE 5--LOANS
Loans at December 31 consist of the following (dollars in thousands):
<TABLE>
<CAPTION>
1997 PERCENT OF 1996 PERCENT OF
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Commercial......................... $36,995 18.99% $ 27,353 20.94%
Real estate construction........... 24,423 12.53% 14,071 10.77%
Real estate mortgage:
1-4 Family....................... 30,036 15.41% 21,381 16.37%
Commercial....................... 94,918 48.71% 61,861 47.35%
Consumer........................... 8,489 4.36% 5,966 4.57%
$194,861 100.00% $ 130,632 100.00%
</TABLE>
Changes in the allowance for credit losses for the years ended December 31 are
as follows (dollars in thousands):
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Balance at beginning of year.................................. $ 1,420 $ 1,376
Provision charged to operations............................... 1,015 261
Transfer from Prairie Security Bank........................... 469 --
Charge-offs................................................... (807) (227)
Recoveries.................................................... 25 10
Net charge-offs............................................. (782) (217)
Balance at end of year...................................... $ 2,122 $ 1,420
Ratio of net charge-offs to average loans outstanding......... .44% .17%
</TABLE>
The recorded investment in impaired loans, which were all on nonaccrual
status, was $4,381,000 and $1,898,000 at December 31, 1997 and 1996,
respectively. At December 31, 1997 and 1996, specific allocations of $139,000
and $132,000, respectively, of the allowance for credit losses were made for
$992,000 and $1,493,000 of these impaired loans. No allocation of the
allowance for credit losses was considered necessary for the remaining
impaired loans. The average recorded investment in impaired loans during the
years ended December 31, 1997 and 1996 was $3,258,000 and $1,017,000,
respectively. No interest income for impaired loans was recognized or
collected in cash in 1997 and 1996.
At December 31, 1997, there were no commitments to lend additional funds to
borrowers whose loans were impaired. Loans over 90 days past due still accruing
interest were $319,000 and $1,238,000 at December 31, 1997 and 1996,
respectively.
Certain related parties of the Bank, principally Bank Directors and their
associates, were loan customers of the Bank in the ordinary course of business
during 1997 and 1996. Total loans outstanding at December 31, 1997 and 1996 to
key officers and Directors were $7,425,000 and $6,568,000, respectively. During
1997, loan advances totaled $2,095,000, and loan repayments totaled $1,238,000
on these loans. In 1996, loan advances totaled $3,510,000 and loan repayments
totaled $2,305,000.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
First Community Financial Group, Inc. and Subsidiaries
December 31, 1997 and 1996
NOTE 6--PREMISES AND EQUIPMENT
The components of premises and equipment at December 31 are as follows (dollars
in thousands):
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Land.......................................................... $ 1,950 $ 1,190
Building...................................................... 8,013 5,972
Equipment, furniture and fixtures............................. 6,175 4,675
Total cost.................................................. 16,138 11,837
Less accumulated depreciation and amortization................ 5,455 4,244
Total premises and equipment................................ $ 10,683 $ 7,593
</TABLE>
The Bank leases equipment and premises under operating leases. Rental expense of
leased premises and equipment was $145,000 and $74,000 for 1997 and 1996,
respectively, which is included in occupancy expense.
Minimum net rental commitments under noncancelable leases having an original or
remaining term of more than one year are as follows at December 31, 1997
(dollars in thousands):
<TABLE>
<S> <C>
1998........................................................ $ 129
1999........................................................ 129
2000........................................................ 109
2001........................................................ 109
2002........................................................ 109
Thereafter.................................................. 56
Total minimum payments required............................. $ 641
</TABLE>
Certain leases contain renewal options of five years and escalation clauses
based on increases in property taxes and other costs.
NOTE 7--DEPOSITS
The aggregate amount of certificates of deposit with balances in excess of
$100,000 was approximately $22,345,000 and $15,035,000 at December 31, 1997 and
1996, respectively.
At December 31, 1997, the scheduled maturities of certificates of deposit are as
follows (dollars in thousands):
<TABLE>
<S> <C>
1998...................................................... $ 99,127
1999...................................................... 6,062
2000...................................................... 1,747
2001...................................................... 248
2002 and thereafter....................................... 209
Total................................................... $ 107,393
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
First Community Financial Group, Inc. and Subsidiaries
December 31, 1997 and 1996
NOTE 8--LONG-TERM DEBT
Long-term debt at December 31 is as follows (dollars in thousands):
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Note payable to a director of the Company due in monthly
installments of $8,000, including interest at .75% over the
prime rate (9.25% at December 31, 1997), collateralized by
equipment. Interest paid in 1997 and 1996 totaled $16,000 and
$22,000 respectively........................................... $ 122 $ 210
Note payable due in monthly installments of $6,000, including
interest at 2.5% over the five-year constant maturity Treasury
index, collateralized by premises. Paid in 1997................ -- 739
Note payable due in annual installments of $100,000, including
interest at 6%, collateralized by premises. Paid in 1997....... -- 100
Note payable on behalf of the Company's KSOP due in monthly
principal installments of $5,000, plus interest at 0.50% over
prime rate (9% at December 31, 1997), collateralized by Company
stock; guaranteed by the Company and the Bank. Paid in 1997.... -- 245
Note payable on behalf of the Company's KSOP due in monthly
principal installments of $15,000, plus interest at 90% of
prime rate (7.65% at December 31, 1997), collateralized by
48,241 shares of Company stock; guaranteed by the Company and
the Bank....................................................... 946 --
Note payable to Key Bank due in annual installments of $550,000,
plus monthly installments of interest at prime rate minus 85
basis points (7.65% at December 31, 1997), collateralized by
investment in First Community Bank, interest paid in 1997
totaled $82,000................................................ 2,750 --
$ 3,818 $ 1,294
</TABLE>
Principal reductions due on the above indebtedness for the years ending December
31 are as follows: 1998--$822,000; 1999--$755,000; 2000-- $728,000;
2001--$728,000; 2002--$728,000; and thereafter--$57,000.
Under the terms of the business loan agreement with Key Bank, the Company and
the Bank must maintain certain financial ratios. The Company and the Bank were
not in compliance with certain covenants at December 31, 1997, but had obtained
a waiver of the covenants through the following year.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
First Community Financial Group, Inc. and Subsidiaries
December 31, 1997 and 1996
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
(dollars in thousands):
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Current (refundable)........................................... $ (8) $ 702
Deferred (benefit)............................................. (225) 16
Total income taxes........................................... $ (233) $ 718
</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>
1997 1996
--------- ---------
<S> <C> <C>
Provision for credit losses.................................... $ (230) $ (106)
Depreciation................................................... (73) (17)
Deferred income................................................ 395 180
Low income housing and alternative minimum tax credits......... (99) 77
Increase (decrease) in valuation reserve....................... -- (77)
Other.......................................................... (218) (41)
Deferred income taxes (benefit).............................. $ (225) $ 16
</TABLE>
The following is a reconciliation between the statutory and the effective
federal income tax rate for the years ended December 31 (dollars in thousands):
<TABLE>
<CAPTION>
1997 1996
---------------------- ----------------------
PERCENT PERCENT
OF PRETAX OF PRETAX
AMOUNT INCOME AMOUNT INCOME
--------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Income tax based on statutory rate........ $ 165 34.0% $ 877 34.0%
Adjustments resulting from:
Tax-exempt income....................... (48) (9.9) (42) (1.6)
Life insurance proceeds................. (377) (77.6) -- --
Goodwill amortization................... 70 14.4 -- --
Tax credits............................. -- -- (77) (3.0)
Other................................... (43) (8.8) (40) (1.6)
Total income tax expense................ $ (233) (47.9%) $ 718 27.8%
</TABLE>
(continued)
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
First Community Financial Group, Inc. and Subsidiaries
December 31, 1997 and 1996
NOTE 9--INCOME TAXES (CONCLUDED)
The tax effects of temporary differences that give rise to significant portions
of deferred tax assets and liabilities at December 31 are (dollars in
thousands):
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Deferred Tax Assets
Allowance for credit losses, in excess of tax reserves......... $ 647 $ 417
Deferred compensation.......................................... 339 147
Low income housing and alternative minimum tax credits......... 1,029 930
Valuation reserve.............................................. (930) (930)
Unrealized loss on securities available for sale............... -- 7
Other deferred tax assets...................................... 48 23
Total deferred tax assets...................................... 1,133 594
Deferred Tax Liabilities
Tax depreciation taken in excess of book depreciation.......... 126 199
Deferred income................................................ 987 592
Unrealized gain on securities available for sale............... 35 --
Other deferred tax liabilities................................. 45 47
Total deferred tax liabilities................................. 1,193 838
Net deferred tax liabilities................................... $ 60 $ 244
</TABLE>
NOTE 10--LIFE INSURANCE PROCEEDS
In the third quarter of 1997, an officer of the Bank died. As owner and
beneficiary of a life insurance policy on the officer, the Company received
$1,419,000 in insurance proceeds. Other income of $1,110,000 was recorded for
the amount of proceeds received in excess of the cash surrender value of the
policy. The former officer was also a participant in the Executive Supplemental
Income Plan (see Note 14). Death benefits to the officer's beneficiary under
that plan have been accrued for by the Company. Expenses recorded in 1997
related to the survivor benefits were $379,000 and are included in employee
benefits expense in the consolidated statements of income.
NOTE 11--REPURCHASE OF STOCK AND STOCK OPTIONS
In February 1997, under a Stock Purchase Agreement between the Company and
certain former directors and shareholders, the Company repurchased 122,750
shares of its stock for $2,512,000. In addition, 66,042 stock options were
repurchased for $1,133,000, which was recorded in non-interest expenses.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
First Community Financial Group, Inc. and Subsidiaries
December 31, 1997 and 1996
NOTE 12--COMMITMENTS AND CONTINGENT LIABILITIES
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.
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 at December 31 is as follows (dollars in thousands):
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Commitments to extend credit:
Real estate secured......................................... $ 13,713 $ 11,401
Credit card lines........................................... 4,865 2,543
Other....................................................... 18,552 18,977
Total commitments to extended credit........................ $ 37,130 $ 32,921
Standby letters of credit..................................... $ 551 $ 487
</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 lines of credit totaling
$3,000,000, none of which were used during 1997 or 1996. 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 $29 million at December 31, 1997).
Borrowings under the Federal Home Loan Bank borrowing line in 1997 or 1996 were
repaid within days of the respective advances, and average balances outstanding
related to these borrowings were nominal.
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.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
First Community Financial Group, Inc. and Subsidiaries
December 31, 1997 and 1996
NOTE 13--SIGNIFICANT CONCENTRATIONS 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 12. 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 14--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. The Company accounts for the KSOP in
accordance with Statement of Position 93-6, Employers' Accounting for Employee
Stock Ownership Plans. 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. KSOP shares were pledged as
collateral for the debt. As the debt is repaid, shares are released and
allocated to active employees, based on the proportion of debt paid. As shares
are released from collateral, the Company reports compensation expense equal to
the current market price of the shares. Shares become outstanding for
earnings-per-share computations at the time of allocation to the active
employees.
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
$320,000 and $191,000 in 1997 and 1996, respectively.
The KSOP shares as of December 31 were as follows:
<TABLE>
<CAPTION>
1997 1996
------------ ----------
<S> <C> <C>
Allocated shares.......................................... 113,830 73,818
Unreleased shares......................................... 48,241 14,700
Total KSOP shares..................................... 162,071 88,518
Fair value of unreleased shares........................... $ 1,181,905 $ 308,000
</TABLE>
(continued)
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
First Community Financial Group, Inc. and Subsidiaries
December 31, 1997 and 1996
NOTE 14--BENEFIT PLANS (CONCLUDED)
Upon termination from the Plan, a participant may choose to have his account
distributed in Company stock, to the extent of his investment in stock, or in
cash. 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, 1997 and 1996, outstanding put options were not
material.
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 1997 and 1996 totaled $23,000 and $124,000, respectively.
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 $348,000 and $54,000 in 1997 and 1996, respectively.
Benefits to employees may be funded by life insurance policies purchased by the
Company, which had cash surrender values of $2,740,000 and $1,961,000 at
December 31, 1997 and 1996, respectively. Liabilities to employees, which are
being accrued over their expected time to retirement, were $263,000 and $113,000
at December 31, 1997 and 1996, 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 $419,000 and $127,000 at December
31, 1997 and 1996, respectively. Accrued liabilities to directors at December
31, 1997 and 1996 totaled $183,000 and $122,000, respectively. Expenses
associated with this plan were $49,000 and $58,000 in 1997 and 1996,
respectively.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
First Community Financial Group, Inc. and Subsidiaries
December 31, 1997 and 1996
NOTE 15--STOCK DIVIDENDS
In 1997 the Board of Directors declared a 5% stock dividend to shareholders of
record as of April 15, 1997. The effect of the dividend was to increase the
number of shares outstanding by 93,678. In 1996 the Board of Directors declared
a 5% stock dividend to shareholders of record on March 20, 1996. The effect of
the dividend was to increase the number of shares outstanding by 80,226.
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 16--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 company has the first right of
refusal to purchase any shares issued under the plan prior to being sold on the
open market.
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 1997 and 1996 under
these plans, consistent with the method prescribed by SFAS No. 123, the
Company's net income and earnings per share would have been reduced to these pro
forma amounts (dollars in thousands):
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Net income:
As reported.................................................... $ 719 $ 1,861
Pro forma...................................................... 333 1,501
Earnings per share:
Basic:
As reported................................................ $ .38 $ 1.06
Pro forma.................................................. .18 .85
Diluted:
As reported................................................ .36 .98
Pro forma.................................................. .17 .79
</TABLE>
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 6.0% to 6.6%; and
expected lives of 10 years for the options.
Options granted during 1997 and 1996 are 20% vested on each of the five
subsequent anniversaries of the grant date. Vesting for 64,500 of these options
is contingent upon "high performance" of the Bank as determined by the Company's
executive committee.
(continued)
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
First Community Financial Group, Inc. and Subsidiaries
December 31, 1997 and 1996
NOTE 16--STOCK OPTION PLANS (CONCLUDED)
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>
WEIGHTED
AVERAGE
EMPLOYEE DIRECTOR TOTAL EXERCISE
OPTIONS OPTIONS OPTIONS PRICE
---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Under option at December 31, 1995...... 257,748 83,491 341,239 $ 10.95
Granted................................ 110,250 -- 110,250 19.05
Exercised.............................. (6,167) -- (6,167) 7.45
Forfeited.............................. (44,857) (5,557) (50,414) 13.05
Under option at December 31, 1996.... 316,974 77,934 394,908 12.99
Granted................................ 141,973 5,548 147,521 18.04
Exercised.............................. (15,132) (2,774) (17,906) 11.36
Forfeited/repurchased.................. (125,673) -- (125,673) 11.73
Under option at December 31, 1997.... 318,142 80,708 398,850 $ 15.14
Options exercisable at December 31,
1997................................. 132,983 67,372 200,354
</TABLE>
The weighted average fair value of options granted during 1997 and 1996 was
$7.90 and $9.45, respectively. In the opinion of management, the assumptions
used in the option-pricing model are subjective and represent only one estimate
of possible value, as there is no active market for Company options granted.
Options becoming exercisable under both stock option plans in future years
ending December 31 are as follows: 1998--67,759; 1999 -67,759; 2000-- 34,958;
2001--18,420; and 2002--9,600.
Options for 51,745 and 32,764 shares remain available to be granted under the
director and employee plans, respectively, at December 31, 1997.
The following information summarizes information about stock options outstanding
at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ---------------------------------------------- -------------------------------------
WEIGHTED
AVERAGE WEIGHTED
RANGE OF REMAINING WEIGHTED AVERAGE
EXERCISE NUMBER CONTRACTUAL AVERAGE NUMBER EXERCISE
PRICES OUTSTANDING LIFE EXERCISE EXERCISABLE PRICE
- ----------------- ----------- --------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Under $10.00 104,536 4 $ 9.10 101,389 $ 4.00
$11.00--$15.00 137,718 6.5 14.45 75,261 14.56
$18.00 108,596 8 18.14 23,704 18.14
$23.00 48,000 10 23.50 -- --
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
First Community Financial Group, Inc. and Subsidiaries
December 31, 1997 and 1996
NOTE 17--CONDENSED FINANCIAL INFORMATION--PARENT COMPANY ONLY
CONDENSED BALANCE SHEETS--DECEMBER 31
(Dollars in Thousands)
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Assets
Cash........................................................ $ 421 $ 443
Investment in subsidiaries.................................. 28,703 18,052
Buildings and equipment..................................... 8 17
Due from subsidiaries....................................... 130 2,477
Other assets................................................ 605 232
Total assets................................................ $ 29,867 $ 21,221
Liabilities and Stockholders' Equity
Liabilities
Long-term debt.............................................. $ 3,696 $ 245
Other liabilities........................................... 6 57
Total liabilities........................................... 3,702 302
Stockholders' Equity.......................................... 26,165 20,919
Total liabilities and stockholders' equity.................. $ 29,867 $ 21,221
Condensed Statements of Income--Years Ended December 31
(Dollars in Thousands)
Operating Income
Dividends received from subsidiaries........................ $ 2,900 $ --
Interest.................................................... 17 22
Total operating income...................................... 2,917 22
Operating Expenses
Interest.................................................... 83 100
Other....................................................... 88 --
Repurchase of stock options................................. 1,133 --
Total operating expenses.................................... 1,304 100
Income (loss) before income taxes and equity in
undistributed income of subsidiaries........................ 1,613 (78)
Income Tax Benefit............................................ (437) (27)
Income (loss) before equity in undistributed income of
subsidiaries................................................ 2,050 (51)
(Dividends in Excess of Net Income of Subsidiaries)/ Equity in
Undistributed Income of Subsidiaries........................ (1,331) 1,912
Net income.................................................. $ 719 $ 1,861
</TABLE>
(continued)
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
First Community Financial Group, Inc. and Subsidiaries
December 31, 1997 and 1996
NOTE 17--CONDENSED FINANCIAL INFORMATION--PARENT COMPANY ONLY (CONCLUDED)
CONDENSED STATEMENTS OF CASH FLOWS--YEARS ENDED DECEMBER 31
(Dollars in Thousands)
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Cash Flows from Operating Activities
Net income.................................................. $ 719 $ 1,861
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
(Equity in undistributed income of subsidiaries)
dividends in excess of net income of subsidiaries..... 1,331 (1,912)
Decrease in due from subsidiaries....................... 2,347 --
Depreciation............................................ 9 6
Other--net.............................................. (434) (7)
Net cash provided by (used in) operating activities......... 3,972 (52)
Cash Flows from Investing Activities
Purchase of Prairie Security Bank........................... (2,319) --
Additional investment in First Community Bank............... (2,000) --
Total cash used in investing activities..................... (4,319) --
Cash Flows from Financing Activities
Proceeds from exercise of stock options..................... 203 45
Payment for fractional shares............................... (13) (11)
Repurchase of common stock.................................. (2,512) --
Proceeds from issuance of long-term debt.................... 2,750 --
Other....................................................... (103) --
Net cash provided by financing activities................... 325 34
Net decrease in cash........................................ (22) (18)
Cash
Beginning of year........................................... 443 461
End of year................................................. $ 421 $ 443
Supplemental Disclosures of Non-Cash Investing Activities
Contribution of investment in Premises, Inc. to the Bank.... $ -- $ 1,480
Common stock issued for purchase of Prairie Security Bank... 7,469 --
Net increase in guaranteed KSOP obligation.................. 701 245
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
First Community Financial Group, Inc. and Subsidiaries
December 31, 1997 and 1996
NOTE 18--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, 1997, the most recent notification from the Bank's regulator
categorized the Bank 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
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
--------- --------- --------- ----- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
December 31, 1997
Tier 1 capital (to average
assets):
Consolidated................ $ 19,159 6.58% $ 11,645 4.00% N/A N/A
FCB......................... 20,491 7.08 11,573 4.00 $ 14,466 5.00%
Tier 1 capital (to risk-weighted
assets):
Consolidated................ 19,159 8.30 9,234 4.00 N/A N/A
FCB......................... 20,491 8.91 9,201 4.00 13,802 6.00
Total capital (to risk-weighted
assets):
Consolidated................ 21,281 9.22 18,468 8.00 N/A N/A
FCB......................... 22,613 9.83 18,402 8.00 23,003 10.00
</TABLE>
(continued)
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
First Community Financial Group, Inc. and Subsidiaries
December 31, 1997 and 1996
NOTE 18--REGULATORY MATTERS (CONCLUDED)
<TABLE>
<CAPTION>
TO BE WELL CAPITALIZED
UNDER PROMPT
CAPITAL ADEQUACY CORRECTIVE ACTION
---------------------- ----------------------
ACTUAL PURPOSES PROVISIONS
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
--------- --------- --------- ----- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
December 31, 1996
Tier 1 capital (to average
assets):
Consolidated................ $ 21,177 11.96% $ 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 6.00
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
</TABLE>
Management believes, as of December 31, 1997, 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, 1997, all of the
Bank's retained earnings were available for dividend declaration to its parent
company without prior regulatory approval.
NOTE 19--FAIR VALUES OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments at December 31
were as follows (dollars in thousands):
<TABLE>
<CAPTION>
1997 1996
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Financial Assets
Cash and due from banks, interest
bearing deposits with banks,
and federal funds sold......... $ 28,268 $ 28,268 $ 22,608 $ 22,608
Securities available for sale.... 41,658 41,658 7,513 7,513
Securities held to maturity...... 959 1,024 3,182 3,249
Loans held for sale.............. 4,304 4,304 726 726
Loans receivable, net............ 192,739 191,505 129,212 128,800
Financial Liabilities
Deposits......................... $ 263,121 $ 263,394 $ 153,434 $ 153,600
Long-term debt................... 3,818 3,818 1,294 1,289
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
First Community Financial Group, Inc. and Subsidiaries
December 31, 1997 and 1996
NOTE 20--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>
1997 1996
--------- ---------
<S> <C> <C>
Amortization...................................................... $ 290 $ --
Office supplies and expense....................................... 204 208
State taxes....................................................... 338 247
Advertising....................................................... 440 172
Consulting........................................................ 518 107
</TABLE>
NOTE 21--EARNINGS PER SHARE DISCLOSURES
Following is information regarding the calculation of basic and diluted
earnings per share for the years indicated.
<TABLE>
<CAPTION>
NET INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
------------ ------------- -----------
<S> <C> <C> <C>
Year Ended December 31, 1997
Basic earnings per share:
Net income........................... $ 719,000 1,894,452 $ .38
Effect of dilutive securities:
Options................................ -- 128,061 (.02)
Diluted earnings per share:
Net income........................... $ 719,000 2,022,513 $ .36
Year Ended December 31, 1996
Basic earnings per share:
Net income........................... $ 1,861,000 1,762,249 $ 1.06
Effect of dilutive securities:
Options.............................. -- 143,691 (.08)
Diluted earnings per share:
Net income........................... $ 1,861,000 1,905,940 $ .98
</TABLE>
The number of shares shown for "options" is the number of incremental shares
that would result from exercise of options and use of the proceeds to repurchase
shares at the average market price during the year.
<PAGE>
PROXY
1998 ANNUAL MEETING
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS MAY 12, 1998
THE UNDERSIGNED HEREBY AUTHORIZES THE VOTE, AS DESIGNATED BELOW, OF ALL THE
SHARES OF COMMON STOCK OF FIRST COMMUNITY FINANCIAL GROUP, INC. HELD ON
RECORD BY THE UNDERSIGNED ON APRIL 15, 1998 AT THE ANNUAL MEETING OF
SHAREHOLDERS TO BE HELD AT 6:00 PM ON MAY 12, 1998 OR ANY ADJOURNMENT OF SUCH
MEETING.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE ELECTION
OF EACH OF THE FOLLOWING DIRECTORS:
PLEASE CHECK ONE BOX FOR EACH DIRECTOR:
--- ----
A. A. RICHARD PANOWICZ / /FOR / /AGAINST / /ABSTAIN
B. KENNETH M. WILCOX / /FOR / /AGAINST / /ABSTAIN
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: SIGNATURES SHOULD AGREE WITH NAME ON LABEL AS INDICATED TO THE RIGHT.
______I PLAN TO ATTEND THE MEETING IN OLYMPIA, WASHINGTON, AT 6:00 PM
ON MAY 12, 1998.
PLEASE DATE, SIGN AND RETURN THIS PROXY. EVEN IF YOU PLAN TO ATTEND THE
MEETING, PLEASE RETURN THIS PROXY.
THANK YOU.
