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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(mark one)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended JUNE 30, 1998
OR
[ ] TRANSITION REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from ________ to ________
Commission File Number 0-24024
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First Community Financial Group, Inc.
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(Exact name of registrant as specified in its charter)
Washington 91 -1277503
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(State or other jurisdiction (IRS Employer Identification Number)
of incorporation or organization)
721 College Street. SE, P.O. Box 3800, Lacey, WA 98509
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(Address of principal executive offices)
Registrant's telephone number: (360) 459-1100
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
----- ------
Indicate the number of shares outstanding in each of the issuer's classes of
common stock, as of the latest practicable date.
Title of Class Outstanding at June 30, 1998
-------------- ----------------------------
Common Stock, $2.50 par value 2,108,560
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FIRST COMMUNITY FINANCIAL GROUP, INC.
Table of Contents
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
<S> <C>
Item 1 Financial Statements
Condensed Consolidated Balance Sheets. . . . . . . . . . . . . . . 3
Condensed Consolidated Statements of Income and
Comprehensive Income . . . . . . . . . . . . . . . . . . . . . . . 4
Condensed Consolidated Statement of Stockholders' Equity . . . . . 5
Condensed Consolidated Statements of Cash Flows. . . . . . . . . . 6
Notes to Condensed Consolidated Financial Statements . . . . . . . 7
Item 2 Management's Discussion of Financial Condition and
Analysis or Plan of Operations . . . . . . . . . . . . . . . . . . 9
PART II - OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . .13
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14
</TABLE>
2
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FIRST COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets (Unaudited)
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
- ---------------------------------------------------------------------------------------------------------
June 30 December 31
1998 1997
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<S> <C> <C>
ASSETS
Cash and due from banks $ 14,949 $ 11,620
Interest bearing deposits in banks 5,946 5,648
Federal funds sold 24,000 11,000
Securities available for sale 49,415 41,658
Securities held to maturity 908 959
Loans held for sale 4,330 4,304
Loans 190,101 194,861
Less allowance for credit losses 2,362 2,122
NET LOANS 187,739 192,739
Premises and equipment 10,338 10,683
Intangible assets 7,697 7,884
Other assets 8,711 7,979
TOTAL ASSETS $314,033 $294,474
LIABILITIES
Deposits:
Non-interest bearing $ 46,012 $ 43,245
Interest bearing 234,952 219,876
TOTAL DEPOSITS 280,964 263,121
Long term debt 3,682 3,818
Other liabilities 1,678 1,370
TOTAL LIABILITIES 286,324 268,309
STOCKHOLDERS' EQUITY
Common stock, par value $2.50 per share; 5,271 4,988
10,000,000 shares authorized, 2,108,560 shares issued
in 1998, and 1,978,886 shares issued in 1997
Surplus 22,664 20,459
Retained earnings 619 1,596
Accumulated other comprehensive income 12 68
Guaranteed KSOP obligation (857) (946)
TOTAL STOCKHOLDERS' EQUITY 27,709 26,165
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $314,033 $294,474
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3
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FIRST COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Income and Comprehensive Income (Unaudited)
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
- ------------------------------------------------------------------------------------------------------------------------
Three months ended Six months ended
June 30 June 30
1998 1997 1998 1997
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $4,973 $4,774 $9,870 $8,873
Federal funds sold and deposits in banks 168 84 371 238
Investments 745 243 1,532 459
TOTAL INTEREST INCOME 5,886 5,101 11,773 9,570
INTEREST EXPENSE
Deposits 2,200 1,807 4,508 3,408
Other 57 35 113 61
TOTAL INTEREST EXPENSE 2,257 1,842 4,621 3,469
NET INTEREST INCOME 3,629 3,259 7,152 6,101
PROVISION FOR CREDIT LOSSES 130 190 260 250
NET INTEREST INCOME AFTER PROVISION
FOR CREDIT LOSSES 3,499 3,069 6,892 5,851
NON-INTEREST INCOME
Service charges on deposit accounts 492 366 971 685
Origination fees on mortgage loans sold 344 197 645 315
Other income 386 186 696 218
TOTAL NON-INTEREST INCOME 1,222 749 2,312 1,218
NON-INTEREST EXPENSE
Salaries and employee benefits 2,021 1,848 3,986 3,277
Occupancy and equipment 543 474 1,114 898
Other expense 1,110 1,154 2,021 2,002
TOTAL NON-INTEREST EXPENSE 3,674 3,476 7,121 6,177
OPERATING INCOME BEFORE INCOME TAXES 1,047 342 2,083 892
Income Taxes 295 94 615 263
NET INCOME $ 752 $ 248 $ 1,468 $ 629
OTHER COMPREHENSIVE INCOME, NET OF TAX
Unrealized holding gains (losses) on securities (43) 26 (56) (9)
arising during the period
COMPREHENSIVE INCOME $ 709 $ 274 $ 1,412 $ 620
EARNINGS PER SHARE DATA
BASIC EARNINGS PER SHARE $0.37 $0.12 $0.72 $0.32
DILUTED EARNINGS PER SHARE $0.34 $0.12 $0.67 $0.30
Weighted average number of common shares 2,049,579 2,014,282 2,047,728 1,949,532
Weighted average number of common shares
- including dilutive stock options 2,205,738 2,141,642 2,203,887 2,076,892
Return on average assets 1.04% 0.38% 1.01% 0.58%
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4
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FIRST COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Stockholders' Equity (Unaudited)
Year Ended December 31, 1997 and Six Months Ended June 30, 1998
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
- ------------------------------------------------------------------------------------------------------------------------
Accumulated
Other Guaranteed
Common Retained Comprehensive KSOP
Stock Surplus Earnings Income Obligation Total
<S> <C> <C> <C> <C> <C> <C>
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)
Other comprehensive income - - - - - - 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
Net income - - - - 1,468 - - - - 1,468
Stock options exercised 45 92 - - - - - - 137
5% stock dividend 248 2,182 (2,445) - - - - (15)
Stock repurchased (10) (69) - - - - - - (79)
Other comprehensive income - - - - - - (56) - - (56)
Net decrease in guaranteed
KSOP obligation - - - - - - - - 89 89
BALANCE, JUNE 30, 1998 $5,271 $22,664 $619 $12 ($857) $27,709
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5
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FIRST COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
- ------------------------------------------------------------------------------------------------------------------------
Six months ended
June 30
1998 1997
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 1,468 $ 629
Adjustments to reconcile net income to net cash provided by (used in)
Operating activities:
Provision for credit losses 260 250
Depreciation and amortization 571 501
Gain on sale of loans - - 40
Amortization of intangible assets 187 68
Other - net 375 (1,332)
Originations of loans held for sale (22,562) (10,520)
Proceeds from sales of loans held for sale 22,536 8,960
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 2,835 (1,404)
CASH FLOWS FROM INVESTING ACTIVITIES
Net (increase) decrease in interest bearing deposits in banks (298) 5,054
Net (increase) decrease in Federal funds sold (13,000) 4,000
Proceeds from maturities of available-for-sale securities 19,174 729
Purchase of available-for-sale securities (27,696) (6,503)
Proceeds from maturities of held-to-maturity securities 50 1,765
Purchases of held-to-maturity securities - - (500)
Net (increase) decrease in loans 4,740 (48,622)
Additions to premises and equipment (226) (2,526)
Increase in intangible assets 0 (5,006)
NET CASH (USED) BY INVESTING ACTIVITIES (17,256) (51,609)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 17,843 48,779
Net decrease in short-term borrowings 0 3,000
Sale of common stock 137 7,465
Repurchase of common stock (79) (2,511)
Repayment of long-term borrowings (136) (882)
Payment for stock dividends fractional shares (15) (13)
NET CASH PROVIDED BY FINANCING ACTIVITIES 17,750 55,838
NET CHANGE IN CASH AND DUE FROM BANKS 3,329 2,825
CASH AND DUE FROM BANKS:
Beginning of period 11,620 8,467
END OF PERIOD $14,949 $11,292
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
CASH PAYMENTS FOR:
Interest $4,682 $1,538
Taxes 640 170
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING ACTIVITIES:
Other real estate acquired in settlement of loans 1,773 192
Increase (decrease) in guarantee of KSOP obligation (89) 980
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
6
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FIRST COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with instructions to Form 10-Q and Rule
10-01 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
adjustments considered necessary for a fair presentation (consisting of
normally recurring accruals) have been included. Operating results for the
three months and six months ended June 30, 1998 are not necessarily
indicative of the results anticipated for the year ending December 31, 1998.
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 at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. Certain prior period
amounts have been reclassified to conform to 1998 presentation.
2. BASIC AND DILUTED EARNINGS PER SHARE
Basic and diluted earnings per share are calculated by dividing net income by
the weighted average number of common shares outstanding during the periods
presented. Diluted earnings per share assumes that all dilutive stock
options outstanding are exercised such that their dilutive effect is
maximized.
The Company adopted SFAS No. 128, "Earnings per Share", effective in the
fourth quarter of 1997. As a result, the Company's earnings per share for all
periods have been restated. The following table reconciles the numerator and
denominator of the basic and diluted earnings per share computations:
<TABLE>
<CAPTION>
Weighted
Net Average Per Share
Income Shares Amount
Three months ended June 30, 1998
--------------------------------
<S> <C> <C> <C>
Basic earnings per share $ 752,000 2,049,579 $0.37
Stock options 156,159
Diluted earnings per share $ 752,000 2,205,738 $0.34
Three months ended June 30, 1997
--------------------------------
Basic earnings per share $ 248,000 2,014,282 $0.12
Stock options 127,360
Diluted earnings per share $ 248,000 2,141,642 $0.12
Six months ended June 30, 1998
--------------------------------
Basic earnings per share $1,468,000 2,047,728 $0.72
Stock options 156,159
Diluted earnings per share $1,468,000 2,203,887 $0.67
Six months ended June 30, 1997
--------------------------------
Basic earnings per share $ 629,000 1,949,532 $0.32
Stock options 127,360
Diluted earnings per share $ 629,000 2,076,892 $0.30
</TABLE>
7
3. ACCOUNTING CHANGE
In the quarter ended March 31, 1998, the Company adopted Statement of
Financial Accounting Standards No. 130, REPORTING COMPREHENSIVE INCOME (SFAS
No. 130), which was effective for years beginning after December 15, 1997.
SFAS No. 130 requires that an entity report and display comprehensive income
with the same prominence as other financial statements. Comprehensive income
is defined as the change in equity of a business enterprise during a period
from transactions and other events and circumstances from nonowner sources.
It includes all changes in equity during a period except those resulting from
investments by owners and distributions to owners. With regard to the
Company, currently the only items of comprehensive income are changes in the
fair value of the available for sale securities portfolio. Accordingly,
changes in the value of that portfolio during the period, net of tax, are
reported as "Other Comprehensive Income" in the accompanying Consolidated
Statement of Income and Comprehensive Income. Changes in the fair value of
the available for sale securities portfolio for the year ended December 31,
1997, which were previously reported in the Consolidated Statement of
Shareholders' Equity, have been reclassified and retroactively reported as
Other Comprehensive Income. The cumulative adjustment, net of tax, to record
the available for sale securities portfolio at fair value at period end was
previously reported as "Net unrealized gain (loss) on securities available
for sale, net of tax" in the Company's consolidated balance sheets. That
cumulative adjustment is now termed "Accumulated other comprehensive income".
There was no effect on previously reported net income as a result of this
reporting change.
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS No.
131, "Disclosure about Segments of an Enterprise and Related Information".
SFAS 131 requires public companies to report financial and descriptive
information about their operating segments. Operating segments are
components of a business about which separate financial information is
available that is evaluated regularly by the chief operating decision-maker
in deciding how to allocate resources and in addressing performance. The
adoption of SFAS 131 is required for fiscal years beginning after December
15, 1997. Thus it will be effective for the year ending December 31, 1998,
although interim presentations in the year of adopting are not required.
8
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This discussion contains certain forward-looking statements within the
meaning of the federal securities laws. Actual results and the timing of
certain events could differ materially from those projected in the
forward-looking statements due to a number of factors. 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, the availability of and costs associated
with sources of liquidity, and uncertainties associated with the impact of
Year 2000 issues.
FINANCIAL CONDITION
OVERVIEW
The Company's consolidated total assets at June 30, 1998 of $314,033,000
represents a 6.6% increase over December 31, 1997 assets of $294,474,000.
The increased assets are a reflection of the 6.8% increase in total deposits.
The deposits at June 30, 1998 reflected a large temporary deposit. Over the
last several days of June, 1998, the deposit balances of a large
transactional depositor increased by nearly $29,500,000, most of which left
the Bank shortly thereafter. Total average assets for the first half of 1998
were $291,385,000, 7.2% less than the June 30, 1998 balance of $314,033,000.
Average deposits for the first half of 1998 were $259,400,000, 7.7% less than
the June 30, 1998 balance of $280,964,000.
Loan portfolio balances have decreased by $4,760,000, or 2.4%, to
$190,101,000. The loan to deposit ratio decreased to 69.2% from 75.7% at
December 31, 1997. This decrease is a result of the deposit transactions
previously discussed. The average loan to deposit ratio for the six months
ended June 30, 1998 was 74.6%. The bank is operating in a competitive market
and an environment of historically low rates. Loan balances are being
subjected to increased prepayments or refinancing of existing loans. The
Company is actively managing the balance between protecting the credit
quality of the portfolio and the addition to the portfolio of loans that
satisfy desired rates and terms.
Non-performing assets were as follows (dollars in thousands):
<TABLE>
<CAPTION>
June 30 December 31
1998 1997
<S> <C> <C>
Non-accrual loans $3,760 $4,381
Accruing loans past due 90 days or more 214 319
Foreclosed real estate 3,627 2,105
Other assets 107 132
$7,708 $6,937
</TABLE>
Total non-performing assets increased eleven percent, or $771,000. This
includes the effects of a $621,000 decrease in non-accrual loans, and a
$1,522,000 increase in foreclosed real estate as collateral is repossessed
and moving toward liquidation.
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. Determination of the appropriate level of the allowance is based on
an analysis of various factors including historical loss experience based on
volumes and types of loans; volumes and trends in delinquencies and
non-accrual loans; trends in portfolio volume; results of internal and
independent external credit reviews; and anticipated economic conditions. An
analysis of the adequacy of the allowance is subject to quarterly review by
the Board of Directors. Based on this analysis, management considers the
allowance for credit losses to be adequate.
The allowance for credit losses increased $240,000 in the first half of 1998.
The ratio of allowance for credit losses to total loans was increased to
1.24% from 1.09% at December 31, 1997. The dollar value change in the
allowance consisted of $260,000 of provisions, offset by $20,000 in net
chargeoffs.
Investment securities have increased by $7,706,000, or 18.1% during the first
half to total $50,323,000. Portfolio management emphasis has been placed on
acquiring primarily shorter term securities in this environment of
historically low rates. While the portfolio is reasonably defensive in the
sense that maturities, or expected calls, have been kept shorter term, and
the portfolio
9
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average life is under two years, the yield has remained stable during the
first two quarters at 6.46%. The securities are highly marketable and are a
primary source of liquidity for the Company.
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 June 30, 1998,
cash, deposits in banks, Federal funds sold and securities available for sale
totaled $94,310,000. External sources refer to the ability to attract new
liabilities and capital. They include increasing savings and demand
deposits, federal funds purchased, and the issuance of capital and debt
securities. At June 30, 1998, federal funds borrowing lines of credit
totaled $19,102,000 (5% of total assets plus $3,400,000) but was not used in
the second quarter of 1998. The Bank also has preestablished borrowing lines
available with the Federal Home Loan Bank of approximately $15,702,000 (5% of
total assets). This credit facility has remained unused in 1998.
Management believes the Bank's liquidity position at June 30, 1998, was
adequate to meet its short term funding requirements.
Interest rate sensitivity is closely related to liquidity, as each is
directly affected by the maturity of assets and liabilities. The Company's
net interest margin is affected by changes in the level of market interest
rates. Management's objectives are to monitor and control interest rate risk
and ensure predictable and consistent growth in net interest income.
Management considers any asset or liability which matures, or is subject to
repricing within one year to be interest sensitive, although continual
monitoring is performed for other time intervals as well. The difference
between interest sensitive assets and liabilities for a defined period of
time is known as the interest sensitivity "gap", and may be either positive
or negative. If positive, more assets reprice before liabilities. If
negative, the reverse is true. Gap analysis provides a general measure of
interest rate risk but does not address complexities such as prepayment risk,
interest rate floors and ceilings imposed on financial instruments, interest
rate dynamics and customers' response to interest rate changes. Currently
the Banks' interest sensitivity gap is negative within one year. Assuming
that general market interest rate changes affected the repricing of assets
and liabilities in equal magnitudes, this indicates that the effects of
rising interest rates on the Company would be a decrease in the net interest
margin, whereas falling interest rates would cause a corresponding increase
in the margin.
CAPITAL
Consolidated capital of FCFG increased $1,544,000 during the first half of
1998. This increase primarily resulted from year-to-date net income of
$1,468,000 in net income generated. The exercising of stock options and
payments on the KSOP obligation, which is guaranteed by the company, also
contributed to the increased capital. The repurchase of certain stock, the
market value adjustment to available for sales securities (other
comprehensive income) and fractional share cash disbursements related to the
stock dividend reduced the balance of capital.
There are regulatory constraints placed upon capital adequacy, and it is
necessary to maintain an appropriate ratio between capital and assets.
Regulations require banks and holding companies to maintain a minimum
"leverage" ratio (primary capital ratio) of total assets. For the most
highly rated holding companies this ratio must be at least 3%, and for others
it must be 4% to 5%. At June 30, 1998, the Company's leverage ratio was
6.64%, compared to 6.58% at year-end 1997. For regulatory purposes, certain
intangible assets are treated as a reduction of capital. In addition, banks
and holding companies are required to meet minimum risk-based capital
guidelines under which risk percentages are assigned to various categories of
assets and off-balance-sheet items to calculate a risk-adjusted capital
ratio. Tier I capital generally consists of common stockholders' equity,
less goodwill, while Tier II capital includes the allowance for possible
credit losses, subject to 1.25% limitation of risk-adjusted assets. The
rules require Tier II capital of 4% of risk-adjusted assets and total capital
(combined Tier I and Tier II) of 8%. At June 30, 1998, the Tier I capital
ratio was 8.98%, and total capital was 10.00%. The similar ratios at
December 31, 1997 were a Tier I capital ratio of 8.30% and a total capital
ratio of 9.22%.
10
<PAGE>
RESULTS OF OPERATIONS
GENERAL
Net income for the six months ended June 30, 1998 was $1,468,000, compared to
$629,000 for the same period in 1997. This represents a 133% increase over
the prior period. The combination of growth in asset base upon which to
generate revenue, coupled with the efficiencies generated by the combination
of the organizations, is producing the desired effect of the strategies
employed in the acquisitions of 1997.
Net income for the three months ended June 30, 1998 was $752,000, compared
to $248,000 for the three months ended June 30, 1997. This 203% increase is
due to the growth experienced during 1997. The second quarter of 1998
includes the full effect of the assets in connection with the acquisition of
four Wells Fargo branches during the third quarter of 1997, along with the
effects of the growth and the efficiencies generated from the 1997
acquisitions, including Prairie Security Bank in the first quarter of 1997.
Net interest income increased $1,051,000 for the six months ended June 30,
1998 over the same period for 1997. This represents a 17% increase from
prior year. The net interest margin decreased 82 basis points from 6.49% to
5.67% over these periods. The net interest margin decrease has been a factor
of decreasing rates in both assets and liabilities. The responsiveness to
rates has been much more pronounced on loans and investments, as discussed
below, than on the deposits because interest earned on loans and investments
is more sensitive to changes in rates than deposits. Net interest income for
the three months ended June 30, 1998 increased $370,000, or 11% over the
comparable period in 1997.
Interest income for the six months ended June 30, 1998 increased $2,203,000
over the six months ended June 30, 1997. Of this increase, approximately
$2,912,000 is attributed to an increase in the average volume of earning
assets, offset by approximately $709,000 as a result of a 85 basis point
decrease in the aggregate yield on earning assets from 10.18% to 9.33%. The
aggregate rate reduction was a factor of the relative mix of the earning
assets and their rates. During the first half of 1998, a greater percentage
of the bank's earning assets were invested in marketable securities than in
previous periods. The yield earned on these securities is less than that
earned on the loan portfolio, which has reduced the overall average yield on
earning assets. If interest rates remain in this relatively low rate
environment, it will continue to pressure the portfolio yield as securities
mature and will be reinvested at generally lower rates. Conversely, if a
greater percentage of earning assets are invested in loans, the overall yield
of earning assets would increase. The Bank is taking measures to increase
loan volume. For similar reasons, interest income for the three months ended
June 30, 1998 increased $785,000 over the three months ended June 30, 1997.
Total interest expense for the six months ended June 30, 1998 increased over
the comparable period of the prior year by $1,152,000, or 33%. Of this
increase, approximately $1,265,000 was due to an increase in the average
volume of interest bearing liabilities, offset by $113,000 resulting from a
15 basis point decrease in the aggregate cost of funds. Total interest
expense for the three months ended June 30, 1998 increased over the
comparable period of the prior year by $415,000, or 23%.
Non-interest income has expanded by 90% over prior year in the first half of
1998. This increase is led by a 105% increase in mortgage loan origination
fees, due to the expansion of the mortgage department and the current
refinancing environment. The growth rate in this area slowed to 75% in the
comparable three months ending June 30 as the refinance activity began to
ease. Service charges on deposit accounts increased 42% for the six months
and 34% for the three months ended June 30, 1998. These increases continue
to reflect the Bank's increased deposit base for the comparable periods.
Other income grew $478,000 as compared to the first six months of 1997 and
$200,000 for the three months ended June 30. The growth is primarily due to
increased sales of non-deposit investment products, income from introduction
of the Bank's debit card product and gain on asset sales and increased ATM
fee income.
Non-interest expenses for the first half of 1998 increased by $944,000, or
15% over the first half of 1997. Similar comparisons of the three months
ending June 30 shows an increase of only 6% as the infrastructure and
staffing is more comparable by including the full effects of the Prairie
Security Bank acquisition in each period. The 1998 results include the
expenses incurred from the operation of the branches acquired from Wells
Fargo while in 1997 they have not yet been incurred. The ratio of
non-interest expense to average assets declined 15% from 5.73% for the six
months ended June 30, 1997, to 4.89% in the current year, reflecting
increased efficiencies. The ratio of net overhead (non-interest expense
minus non-interest income) divided by average total assets decreased 28% from
4.60% for the six months ended June 30, 1997 to 3.30% for the six months
ended June 30, 1998.
11
<PAGE>
YEAR 2000
The Company is actively reviewing its systems to insure the Company is able
to efficiently process in the new millennium. The review includes a study of
the Company's hardware and software, a review of the Company's vendors, and
an analysis of the credit and liquidity risks associated with customers who
may not be prepared for the conversion. Based on current information,
management believes that the Company will be fully compliant to meet all
operating and regulatory issues well in advance of December 31, 1999.
Although not completely quantified, costs of Year 2000 compliance are not
expected to exceed $150,000 and will be largely incurred during 1998 and
1999. However, the impact of failure of computer systems of customers,
certain vendors and others with whom the Company does business is uncertain
and has not been quantified by the Company.
12
<PAGE>
FIRST COMMUNITY FINANCIAL GROUP, INC.
PART II - OTHER INFORMATION
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits None
(b) Reports on Form 8-K None
13
<PAGE>
FIRST COMMUNITY FINANCIAL GROUP, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST COMMUNITY FINANCIAL GROUP, INC.
(Registrant)
<TABLE>
<S> <C>
Date: August 14, 1998 By: /s/ Ken F. Parsons
---------------------------------------
Ken F. Parsons
President, Chief Executive Officer
By: /s/ James F. Arneson
---------------------------------------
James F. Arneson
Executive Vice President,
Chief Financial Officer
(Principal Accounting Officer)
</TABLE>
14
<TABLE> <S> <C>
<PAGE>
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