<PAGE>
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 SEPTEMBER 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
-----------------
FIRST COMMUNITY FINANCIAL GROUP, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Washington 91 -1277503
----------------------------- -----------------------------------
(State or other jurisdiction (IRS Employer Identification Number)
of incorporation or organization)
721 College Street. SE, P.O. Box 3800, Lacey, WA 98509
-------------------------------------------------------
(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.
<TABLE>
<CAPTION>
Title of Class Outstanding at September 30, 1998
-------------- ----------------------------------
<S> <C>
Common Stock, $2.50 par value 2,108,560
</TABLE>
<PAGE>
FIRST COMMUNITY FINANCIAL GROUP, INC.
Table of Contents
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION 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 and Analysis of Financial Condition and
Results of Operation...................................................... 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)
- ----------------------------------------------------------------------------------------------------
September 30 December 31
1998 1997
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 14,557 $ 11,620
Interest bearing deposits in banks 44 5,648
Federal funds sold 2,300 11,000
Securities available for sale 48,055 41,658
Securities held to maturity 807 959
Loans held for sale 4,133 4,304
Loans 190,513 194,861
Less allowance for credit losses 2,201 2,122
-------- --------
NET LOANS 188,312 192,739
Premises and equipment 10,128 10,683
Intangible assets 7,595 7,884
Other assets 6,853 7,979
-------- --------
TOTAL ASSETS $282,784 $294,474
LIABILITIES
Deposits:
Non-interest bearing $ 54,008 $ 43,245
Interest bearing 191,594 219,876
-------- --------
TOTAL DEPOSITS 245,602 263,121
Federal funds purchased 3,000 0
Long term debt 3,012 3,818
Other liabilities 2,190 1,370
-------- --------
TOTAL LIABILITIES 253,804 268,309
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 1,555 1,596
Accumulated other comprehensive income 302 68
Guaranteed KSOP obligation (812) (946)
-------- --------
TOTAL STOCKHOLDERS' EQUITY 28,980 26,165
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $282,784 $294,474
-------- --------
-------- --------
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3
<PAGE>
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 Nine months ended
September 30 September 30
1998 1997 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $4,945 $4,993 $14,815 $13,845
Federal funds sold and deposits in banks 62 187 433 253
Investments 863 619 2,395 1,212
------ ------ ------- -------
TOTAL INTEREST INCOME 5,870 5,799 17,643 15,310
INTEREST EXPENSE
Deposits 2,079 2,126 6,587 5,534
Other 50 37 163 98
------ ------ ------- -------
TOTAL INTEREST EXPENSE 2,129 2,163 6,750 5,632
NET INTEREST INCOME 3,741 3,636 10,893 9,678
PROVISION FOR CREDIT LOSSES 65 475 325 725
NET INTEREST INCOME AFTER PROVISION
FOR CREDIT LOSSES 3,676 3,161 10,568 8,953
Non-interest income
Service charges on deposit accounts 477 436 1,448 1,120
Origination fees on mortgage loans sold 277 191 922 506
Other income 493 1,287 1,189 1,576
------ ------ ------- -------
TOTAL NON-INTEREST INCOME 1,247 1,914 3,559 3,202
NON-INTEREST EXPENSE
Salaries and employee benefits 1,982 2,433 5,968 5,792
Occupancy and equipment 541 564 1,655 1,468
Other expense 1,132 1,546 3,153 3,485
------ ------ ------- -------
TOTAL NON-INTEREST EXPENSE 3,655 4,543 10,776 10,745
OPERATING INCOME BEFORE INCOME TAXES 1,268 532 3,351 1,410
Income Taxes 332 (228) 947 21
NET INCOME $ 936 $ 760 $ 2,404 $ 1,389
OTHER COMPREHENSIVE INCOME, NET OF TAX
Unrealized holding gains on securities 290 37 234 28
arising during the period
COMPREHENSIVE INCOME $1,226 $ 797 $ 2,638 $ 1,417
EARNINGS PER SHARE DATA
BASIC EARNINGS PER SHARE $0.44 $0.36 $1.17 $0.70
DILUTED EARNINGS PER SHARE $0.41 $0.34 $1.09 $0.66
Weighted average number of common shares 2,108,560 2,082,299 2,052,890 1,973,535
Weighted average number of common shares
- including dilutive stock options 2,264,719 2,215,329 2,209,049 2,106,565
Return on average assets 1.31% 1.17% 1.12% 0.78%
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4
<PAGE>
FIRST COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Stockholders' Equity (Unaudited)
Year Ended December 31, 1997 and Nine Months Ended September 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 -- -- 2,404 -- -- 2,404
Stock options exercised 45 92 -- -- -- 137
5% stock dividend 248 2,182 (2,445) -- -- (15)
Stock repurchased (10) (69) -- -- -- (79)
Other comprehensive income -- -- -- 234 -- 234
Net decrease in guaranteed
KSOP obligation -- -- -- -- 134 134
BALANCE, SEPTEMBER 30, 1998 $5,271 $22,664 $1,555 $302 $(812) $28,980
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5
<PAGE>
FIRST COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
- ----------------------------------------------------------------------------------------------------------
Nine months ended
September 30
1998 1997
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 2,404 $ 1,389
Adjustments to reconcile net income to net cash provided by (used in)
Operating activities:
Provision for credit losses 325 725
Depreciation and amortization 949 778
Gain on sale of loans -- 40
Amortization of intangible assets 289 146
Other - net 2,498 (2,532)
Originations of loans held for sale (33,236) (16,774)
Proceeds from sales of loans held for sale 33,407 14,514
-------- --------
NET CASH PROVIDED (used) BY OPERATING ACTIVITIES 6,636 (1,714)
CASH FLOWS FROM INVESTING ACTIVITIES
Net decrease in interest bearing deposits in banks 5,604 8,119
Net (increase) decrease in Federal funds sold 8,700 (13,000)
Proceeds from maturities of available-for-sale securities 25,943 5,470
Purchase of available-for-sale securities (32,522) (36,041)
Proceeds from maturities of held-to-maturity securities 150 2,265
Purchases of held-to-maturity securities -- (500)
Net (increase) decrease in loans 4,102 (57,833)
Additions to premises and equipment (394) (4,590)
Increase in intangible assets -- (5,204)
-------- --------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES 11,583 (101,314)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits (17,519) 100,443
Net increase in federal funds purchased 3,000 --
Sale of common stock 137 7,651
Repurchase of common stock (79) (2,511)
Long term borrowings -- 2,750
Repayment of long-term borrowings (806) (837)
Payment for stock dividends fractional shares (15) (13)
-------- --------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES (15,282) 107,483
NET CHANGE IN CASH AND DUE FROM BANKS 2,937 4,455
CASH AND DUE FROM BANKS:
Beginning of period 11,620 8,467
END OF PERIOD $14,557 $12,922
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
CASH PAYMENTS FOR:
Interest $6,846 $5,486
Taxes 790 430
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING ACTIVITIES:
Other real estate acquired in settlement of loans 2,279 303
Increase (decrease) in guarantee of KSOP obligation (134) 936
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
6
<PAGE>
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 nine months
ended September 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
<S> <C> <C> <C>
Three Months ended September 30, 1998
---------------------------------------------------
Basic earnings per share $ 936,000 2,108,560 $0.44
Stock options 156,159
Diluted earnings per share $ 936,000 2,264,719 $0.41
Three Months ended September 30, 1997
----------------------------------------------------
Basic earnings per share $ 760,000 2,082,299 $0.36
Stock options 133,030
Diluted earnings per share $ 760,000 2,215,329 $0.34
Nine Months ended September 30, 1998
---------------------------------------------------
Basic earnings per share $2,404,000 2,052,890 $1.17
Stock options 156,159
Diluted earnings per share $2,404,000 2,209,049 $1.09
Nine Months ended September 30, 1997
----------------------------------------------------
Basic earnings per share $1,389,000 1,973,535 $0.70
Stock options 133,030
Diluted earnings per share $1,389,000 2,106,565 $0.66
</TABLE>
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
7
<PAGE>
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 September 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
<PAGE>
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 September 30, 1998 of $282,784,000
represents a 4.0% decrease over December 31, 1997 assets of $294,474,000.
Total average assets for the first three quarters of 1998 were $289,320,000,
2.3% greater than the September 30, 1998 balance. Total assets at September
30, 1998 reflect a balance more representative of balances throughout the
quarter, unexaggerated by any large transactional deposit balances that have
affected previous quarter-end balances. The decrease in assets reported for
the third quarter is primarily a reflection of the decrease in total deposits
and its corresponding reduction in Federal funds sold and interest bearing
deposits. Prior quarter ends in 1998 and, to a lesser degree December 31,
1997, have been influenced by abnormally large deposits on or around the last
day of the period. As a result, deposit balances on the final day of the
quarter have been exaggerated along with the Federal funds sold item where
such short term deposits are maintained to ensure the liquidity when the
balances begin to be drawn down over the next few days.
Loan portfolio balances have decreased by $4,348,000, or 2.2%, to $190,513,000.
The loan to deposit ratio increased in the third quarter to 77.6% from 74.1% at
December 31, 1997. This relative increase is a result of the short term deposit
reductions previously discussed. The average loan to deposit ratio for the
nine months ended September 30, 1998 was 75.1%. The bank is operating in a
competitive market and an environment of historically low rates. Loan balances
are being subjected to increased prepayments and refinancing of existing loans.
The Company actively seeks to manage 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>
September 30 December 31
1998 1997
<S> <C> <C>
Non-accrual loans $2,088 $4,381
Accruing loans past due 90 days or more 411 319
Foreclosed real estate 2,199 2,105
Other assets 0 132
------- -------
$4,698 $6,937
</TABLE>
Total non-performing assets have decreased 32%, or $2,239,000. This includes
the effects of a $2,293,000 decrease in non-accrual loans, and a $94,000
increase in foreclosed real estate as collateral is repossessed and moving
toward liquidation. The Company continues to make progress in the liquidation
of non-performing assets acquired from Northwest Community Bank and Prairie
Security Bank.
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 $79,000 in the first three quarters of
1998. The ratio of allowance for credit losses to total loans was increased to
1.16% from 1.09% at December 31, 1997. The dollar value change in the allowance
consisted of $325,000 of provision for credit loss, offset by $246,000 in net
chargeoffs.
9
<PAGE>
Investment securities have increased by $6,245,000, or 14.7% during the first
three quarters to total $48,862,000. Portfolio management emphasis has been
placed on acquiring primarily shorter term securities in this environment of
historically low rates. While maturities, or expected calls, have been kept
shorter term, and the portfolio average life is under two years, the yield has
remained stable during the first three quarters at 6.43%. 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 September 30, 1998,
cash, deposits in banks, Federal funds sold and securities available for sale
totaled $64,956,000. 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
September 30, 1998, federal funds borrowing lines of credit totaled
$17,539,000 (5% of total assets plus $3,400,000). The Bank also has
preestablished borrowing lines available with the Federal Home Loan Bank of
approximately $14,139,000 (5% of total assets). This credit facility has
remained unused in 1998.
Management believes the Bank's liquidity position at September 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 Bank's 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 $2,815,000 during the first three
quarters of 1998. This increase primarily resulted from year-to-date net income
of $2,404,000. The exercising of stock options and payments on the KSOP
obligation, which is guaranteed by the Company, also contributed to the
increased capital. The market value adjustment to available for sale securities
(other comprehensive income) has provided an additional $234,000 in unrealized
gains on investments during 1998. The repurchase of certain stock 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 September 30, 1998, the Company's leverage ratio was
7.74%, 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 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 September 30, 1998, the Tier I
capital ratio was 9.83%, and total capital was 10.82%.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 nine months ended September 30, 1998 was $2,404,000, compared
to $1,389,000 for the same period in 1997. This represents a 73% increase over
the prior period. The combination of growth in asset base upon which to
generate revenue, coupled with the efficiencies generated by the integration of
the acquired organizations, is producing the desired effect of the strategies
employed in the acquisitions of 1997.
Net income for the three months ended September 30, 1998 was $936,000, compared
to $760,000 for the three months ended September 30, 1997. The third quarter
represents the first period where 1997 and 1998 operations are directly
comparable given the acquisitions that took place in February and July, 1997.
Non-interest income for the third quarter 1997 was exaggerated by the
realization of a non-recurring life insurance windfall.
Net interest income increased $1,215,000 for the nine months ended September 30,
1998 over the same period for 1997. This represents a 13% increase from prior
year. The net interest margin decreased 51 basis points from 6.30% to 5.79%
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. Although the repricing frequency of loans are less than
deposits, the magnitude of a rate change is greater for the loan portfolio than
for deposits. Net interest income for the three months ended September 30, 1998
increased $105,000, or 3% over the comparable period in 1997.
Interest income for the nine months ended September 30, 1998 increased
$2,333,000 over the nine months ended September 30, 1997. Of this increase,
approximately $3,479,000 is attributed to an increase in the average volume of
earning assets, offset by approximately $1,146,000 as a result of a 88 basis
point decrease in the aggregate yield on earning assets from 10.24% to 9.36%.
The aggregate rate reduction was a factor of the relative mix of the earning
assets and their rates. During the first three quarters 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. Interest income for the three months ended September 30, 1998 increased
$71,000 over the three months ended September 30, 1997.
Total interest expense for the nine months ended September 30, 1998 increased
over the comparable period of the prior year by $1,118,000, or 20%. Of this
increase, approximately $1,310,000 was due to an increase in the average volume
of interest bearing liabilities, offset by $192,000 resulting from a 15 basis
point decrease in the aggregate cost of funds. Total interest expense for the
three months ended September 30, 1998 decreased over the comparable period of
the prior year by $34,000, or 2%.
Non-interest income has expanded by 11% over prior year in the first three
quarters of 1998. This increase is led by a 82% increase in mortgage loan
origination fees, due to the current refinancing environment. The growth rate
in this area slowed to 45% in the comparable three months ending September 30.
Service charges on deposit accounts increased 29% for the nine months and 9% for
the three months ended September 30, 1998. Other income decreased $387,000 from
the first nine months of 1997 and $794,000 from the three months ended September
30. The relative decrease in these time periods is directly related to the
receipt of life insurance proceeds on a former President of First Community
Bank. This is an unusual item and without its impact, 1998 other income would
have reported an increase over 1997 of 155% for the first nine months.
Non-interest expenses for the first three quarters of 1998 increased by
$31,000, or 0.3% over the first three quarters of 1997. Similar comparisons
of the three months ending September 30 shows a decrease of $888,000, or 20%
as the infrastructure and staffing is comparable by including the full
effects of both the Prairie Security Bank and Wells Fargo branch acquisitions
in each period. The 1997 results include an expense recognized in relation to
the life insurance proceeds. Excluding this unusual expense of approximately
$379,000, 1998 year-to-date non-interest expense increased by $410,000, or
4%, while the non-interest expense for the three months ended September 30,
1998 has decreased by $509,000, or 12% from the results of the prior year.
The 1998 results include the expenses incurred from the operation of the
branches acquired from Wells Fargo, while in 1997 period includes little more
than two months. The ratio of non-interest expense to average assets
declined 19% from 6.10% (5.89% net of unusual insurance expenditure) for the
nine months ended September 30, 1997, to 4.97% 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
29% from 3.52% (3.21% net of unusual insurance effects) for the nine months
ended September 30, 1997 to 2.49% for the nine months ended September 30,
1998.
11
<PAGE>
YEAR 2000
The Year 2000 issue arises due to the fact that many computer systems were
originally programmed using two digits rather than four digits to identify the
applicable year. With the coming of the new millennium, these systems could
interpret the year as 1900 rather than 2000. Unless hardware, system software
and applications are corrected to be Year 2000 compliant, computers and the
devices they control could generate miscalculations and create operational
problems. Various systems could be affected ranging from complex computer
systems to telephone systems, electrical power generation and distribution and
ATMs.
To address this issue, the Company has developed a plan, including the formation
of a team consisting of internal resources. The plan, which originated in 1997,
has been in implementation since that time and has undergone appropriate
modifications as warranted by changing circumstances. The Company has
prioritized the various operating systems in use that could be effected by the
Year 2000, and efforts to ensure compliance of core systems that are deemed to
be critical to the Company's operations have been accelerated. The plan calls
for these mission critical systems to be tested and certified compliant by
December 31, 1998. According to the plan, the testing of other non-mission
critical systems are to be substantially complete by March 31, 1999. The
Company is monitoring the efforts of its business partners, suppliers and
customers involved in addressing the potential problem on a ongoing basis.
Management is not aware of any circumstance that would preclude the substantial
achievement of the milestone dates outlined in the plan. In the event the test
of a mission critical system indicates that the system is not, or will not be
Year 2000 compliant, contingency plans have been developed to convert processing
applications to systems of other vendors.
The cost of the project, currently estimated to be approximately $500,000,
consists primarily of capital expenditures for new or upgraded systems.
Approximately half of these costs will be incurred in the fourth quarter of
1998, with the remaining amount expended in the first half of 1999.
Financial institutions may experience increases in problem loans and credit
losses in the event that borrowers fail to properly respond to this issue, and
higher funding costs may come about if consumers react to publicity about the
issue by withdrawing deposits. The bank could also be impacted if third
parties it deals with in conducting its business, such as governmental agencies,
clearing houses, correspondent banks, telephone and power companies, and other
service providers fail to properly address this issue. Accordingly, the
Company's Year 2000 project team is identifying critical business interfaces,
assessing potential problems, and where appropriate, developing contingency
plans.
Because the Year 2000 issue has never previously occurred, it is not possible to
foresee or quantify the overall financial and operational impact and/or to
determine whether it will be material to the financial condition or operations
of the Company. The foregoing estimates were derived using numerous assumptions
about future events, including the continued availability of certain resources
and other factors. There can be no guarantee that these estimates will be
achieved, and actual results could differ materially from those anticipated.
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)
Date: November 13, 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)
14
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<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 14,557
<INT-BEARING-DEPOSITS> 44
<FED-FUNDS-SOLD> 2,300
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 48,055
<INVESTMENTS-CARRYING> 807
<INVESTMENTS-MARKET> 870
<LOANS> 194,646
<ALLOWANCE> 2,201
<TOTAL-ASSETS> 282,784
<DEPOSITS> 245,602
<SHORT-TERM> 3,000
<LIABILITIES-OTHER> 2,190
<LONG-TERM> 3,012
0
0
<COMMON> 5,271
<OTHER-SE> 23,709
<TOTAL-LIABILITIES-AND-EQUITY> 282,784
<INTEREST-LOAN> 14,815
<INTEREST-INVEST> 2,395
<INTEREST-OTHER> 433
<INTEREST-TOTAL> 17,643
<INTEREST-DEPOSIT> 6,587
<INTEREST-EXPENSE> 6,750
<INTEREST-INCOME-NET> 10,893
<LOAN-LOSSES> 325
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 10,776
<INCOME-PRETAX> 3,351
<INCOME-PRE-EXTRAORDINARY> 3,351
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,404
<EPS-PRIMARY> 1.17
<EPS-DILUTED> 1.09
<YIELD-ACTUAL> 9.36
<LOANS-NON> 2,088
<LOANS-PAST> 411
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,122
<CHARGE-OFFS> 329
<RECOVERIES> 83
<ALLOWANCE-CLOSE> 2,201
<ALLOWANCE-DOMESTIC> 2,201
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
