<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 June 30, 1999
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.
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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, 1999
-------------- ----------------------------
Common Stock, $2.50 par value 2,175,667
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FIRST COMMUNITY FINANCIAL GROUP, INC.
Table of Contents
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PART I - FINANCIAL INFORMATION Page
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<S> <C> <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........................................... 8
Item 3 Year 2000 Issues.........................................................11
PART II - OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K.........................................13
SIGNATURES.........................................................................14
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2
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FIRST COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets (Unaudited)
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
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June 30 December 31
1999 1998
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<S> <C> <C>
ASSETS
Cash and due from banks $ 16,560 $ 12,315
Interest bearing deposits in banks 108 127
Federal funds sold 3,900 2,815
Securities available for sale 32,407 35,418
Securities held to maturity 677 677
Loans held for sale 3,270 4,456
Loans 213,903 194,361
Less allowance for credit losses 2,472 2,290
NET LOANS 211,431 192,071
Premises and equipment 9,731 9,474
Intangible assets 7,289 7,493
Other assets 6,515 6,720
TOTAL ASSETS $291,888 $271,566
LIABILITIES
Deposits:
Non-interest bearing $ 53,567 $ 46,538
Interest bearing 199,405 189,049
TOTAL DEPOSITS 252,972 235,587
Short term borrowing 2,850 500
Long term debt 2,669 2,808
Other liabilities 1,967 2,330
TOTAL LIABILITIES 260,458 241,225
STOCKHOLDERS' EQUITY
Common stock, par value $2.50 per share; 5,439 5,315
10,000,000 shares authorized, 2,175,667 shares issued
in 1999, and 2,108,560 shares issued in 1998
Surplus 23,240 22,849
Retained earnings 3,329 2,757
Accumulated other comprehensive income (109) 28
Guaranteed KSOP obligation (469) (608)
TOTAL STOCKHOLDERS' EQUITY 31,430 30,341
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $291,888 $271,566
</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
1999 1998 1999 1998
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 5,048 $ 4,973 $ 9,785 $ 9,870
Federal funds sold and deposits in banks 28 168 74 371
Investments 493 745 1,010 1,532
TOTAL INTEREST INCOME 5,569 5,886 10,869 11,773
INTEREST EXPENSE
Deposits 1,744 2,200 3,448 4,508
Other 64 57 109 113
TOTAL INTEREST EXPENSE 1,808 2,257 3,557 4,621
NET INTEREST INCOME 3,761 3,629 7,312 7,152
PROVISION FOR CREDIT LOSSES 120 130 240 260
NET INTEREST INCOME AFTER PROVISION
FOR CREDIT LOSSES 3,641 3,499 7,072 6,892
NON-INTEREST INCOME
Service charges on deposit accounts 493 492 952 971
Origination fees on mortgage loans sold 291 344 589 645
Other income 381 386 694 696
TOTAL NON-INTEREST INCOME 1,165 1,222 2,235 2,312
NON-INTEREST EXPENSE
Salaries and employee benefits 2,047 2,021 4,013 3,986
Occupancy and equipment 524 543 1,094 1,114
Other expense 1,102 1,110 2,068 2,021
TOTAL NON-INTEREST EXPENSE 3,673 3,674 7,175 7,121
OPERATING INCOME BEFORE INCOME TAXES 1,133 1,047 2,132 2,083
Income Taxes 364 295 689 615
NET INCOME $ 769 $ 752 $ 1,443 $ 1,468
OTHER COMPREHENSIVE INCOME, NET OF TAX
Unrealized holding gains (losses) on securities (199) (43) (137) (56)
arising during the period
COMPREHENSIVE INCOME $ 570 $ 709 $ 1,306 $ 1,412
EARNINGS PER SHARE DATA
BASIC EARNINGS PER SHARE $ 0.36 $ 0.37 $ 0.68 $ 0.72
DILUTED EARNINGS PER SHARE $ 0.34 $ 0.34 $ 0.64 $ 0.67
Weighted average number of common shares 2,137,615 2,049,579 2,119,646 2,047,728
Weighted average number of common shares
- including dilutive stock options 2,279,144 2,205,738 2,261,175 2,203,887
Return on average assets 1.10% 1.04% 1.05% 1.01%
</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, 1998 and Six Months Ended June 30, 1999
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
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Accumulated
Other Guaranteed
Common Retained Comprehensive KSOP
Stock Surplus Earnings Income Obligation Total
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1997 $4,988 $20,459 $ 1,596 $ 68 $ (946) $26,165
Net income - - - - 3,605 - - - - 3,605
Stock options exercised 89 188 - - - - - - 277
5% stock dividend 248 2,182 (2,444) - - - - (14)
Stock repurchased (10) (70) - - - - - - (80)
Other comprehensive income - - - - - - (40) - - (40)
Income tax benefit from exercise
of stock options - - 80 - - - - - - 80
Compensation expense for
issuance of stock options - - 10 - - - - - - 10
Net decrease in guaranteed
KSOP obligation - - - - - - - - 338 338
BALANCE DECEMBER 31, 1998 5,315 22,849 2,757 28 (608) 30,341
Net income - - - - 1,443 - - - - 1,443
Stock options exercised 124 391 - - - - - - 515
Cash dividends - - - - (871) - - - - (871)
Other comprehensive income - - - - - - (137) - - (137)
Net decrease in guaranteed
KSOP obligation - - - - - - - - 139 139
BALANCE, JUNE 30, 1999 $5,439 $23,240 $ 3,329 $(109) $ (469) $31,430
</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)
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<CAPTION>
(DOLLARS IN THOUSANDS)
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Six months ended
June 30
1999 1998
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 1,443 $ 1,468
Adjustments to reconcile net income to net cash provided by (used in)
Operating activities:
Provision for credit losses 240 260
Depreciation and amortization 547 571
Amortization of intangible assets 204 187
Other - net (30) 375
Originations of loans held for sale (22,608) (22,562)
Proceeds from sales of loans held for sale 23,794 22,536
NET CASH PROVIDED BY OPERATING ACTIVITIES 3,590 2,835
CASH FLOWS FROM INVESTING ACTIVITIES
Net (increase) decrease in interest bearing deposits in banks 19 (298)
Net increase in Federal funds sold (1,085) (13,000)
Proceeds from maturities of available-for-sale securities 16,668 19,174
Purchase of available-for-sale securities (13,783) (27,696)
Proceeds from maturities of held-to-maturity securities 0 50
Net (increase) decrease in loans (19,600) 4,740
Additions to premises and equipment (804) (226)
NET CASH USED BY INVESTING ACTIVITIES (18,585) (17,256)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 17,385 17,843
Net increase in short-term borrowings 2,350 0
Sale of common stock 515 137
Repurchase of common stock 0 (79)
Repayment of long-term borrowings (139) (136)
Payment for dividends (871) (15)
NET CASH PROVIDED BY FINANCING ACTIVITIES 19,240 17,750
NET CHANGE IN CASH AND DUE FROM BANKS 4,245 3,329
CASH AND DUE FROM BANKS:
Beginning of period 12,315 11,620
END OF PERIOD $ 16,560 $ 14,949
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
CASH PAYMENTS FOR:
Interest $3,596 $4,682
Taxes 840 640
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING ACTIVITIES:
Other real estate acquired in settlement of loans 334 1,773
Increase (decrease) in guarantee of KSOP obligation (139) (89)
</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, 1999 are not necessarily indicative of the results anticipated for the
year ending December 31, 1999.
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.
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.
7
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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, 1999 experienced a growth
7.5% over December 31, 1998 assets of $271,566,000 to $291,888,000. The
increased assets are a reflection of the 7.4% increase in total deposits.
Portfolio loan balances, excluding those loans held for sale, net of allowance,
increased by 10.1% in the first six months of 1999. The second quarter growth in
portfolio loans accounted for 8.5% of the total.
Loan portfolio balances have increased by $19,542,000, or 10.1%, to
$213,903,000. The total loan to deposit ratio increased to 85.8% from 84.4% at
December 31, 1998. The average loan to deposit ratio for the six months ended
June 30, 1999 was 85.2% as this relationship was sustained. The bank is
operating in a competitive market and an environment of, while rising,
historically low rates. In spite of these conditions, loan balances were able to
record such sizable increases with emphasis on maintaining 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
1999 1998
<S> <C> <C>
Non-accrual loans $1,315 $2,492
Accruing loans past due 90 days or more 128 471
Foreclosed real estate 1,737 2,096
Other assets 20 0
$3,200 $5,059
</TABLE>
Total non-performing assets were decreased by $1,859,000 or 36.7%. The reduction
in these non-performing assets were consistent among the categories with the
exception of other assets, where foreclosed assets at June 30, 1999 amounted to
$20,000.
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 $182,000 in the first half of 1999.
The ratio of allowance for credit losses to total loans was decreased from 1.18%
to 1.16% on June 30, 1999 due to loan growth and improvements in non-performing
assets. The dollar value change in the allowance consisted of $240,000 of
provisions, offset by $58,000 in net chargeoffs.
Investment securities have decreased by $3,011,000, or 8.5% during the first
half of 1999 to total $33,084,000. Portfolio balances have decreased as a result
of the maturity of securities in the portfolio and principal payments on
mortgage backed and related issues. Portfolio balances are managed in
conjunction with the remainder of the balance sheet and support the lending and
depository functions of the Bank. Balances will increase and decrease as
resource demands and liquidity dictates. The securities are highly marketable
and are a primary source of liquidity for the Company.
8
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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, 1999, cash, deposits in banks, Federal funds
sold and securities available for sale totaled $52,975,000. 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, 1999, federal funds
borrowing lines of credit totaled $20,594,000 (5% of total assets plus
$6,000,000). The Bank also has preestablished borrowing lines available with the
Federal Home Loan Bank of approximately $14,594,000 (5% of total assets). These
credit facilities have been used regularly as a source of funds in 1999 as a
result of loan balance growth.
Management believes the Bank's liquidity position at June 30, 1999, 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 $1,089,000 during the first half of 1999.
This increase primarily resulted from year-to-date net income of $1,443,000. The
exercising of stock options and payments on the KSOP obligation, which is
guaranteed by the Company, contributed $515,000 and $139,000, respectively, to
the increased capital. Two items reduced the capital accounts. Cash dividend
payments amounted to $871,000. Other comprehensive income, which consists of the
after-tax market value adjustment to available for sale securities, decreased
the consolidated capital by $137,000 during the first half of 1999. This
unrealized adjustment to the securities portfolio is a reflection of the
increase in market interest rates experienced, primarily in the second quarter,
and will not be realized if securities are not sold prior to maturity.
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, 1999, the Company's leverage ratio was 9.04%, compared to 8.59% at
December 31, 1998. 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 total capital
includes the allowance for credit losses, subject to 1.25% limitation of
risk-adjusted assets. The rules require Tier I capital of 4% of risk-adjusted
assets and total capital of 8%. At June 30, 1999, the Tier I capital ratio was
9.77%, and total capital was 10.74%. The comparable ratios at December 31, 1998
were a Tier I capital ratio of 10.60% and a total capital ratio of 11.64%.
9
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RESULTS OF OPERATIONS
GENERAL
Net income for the six months ended June 30, 1999 was $1,443,000, compared to
$1,468,000 for the same period in 1998. This represents a 4% decrease over the
prior period. Pre-tax operating income, however, increased by 1% to $2,099,000.
The income tax expense increase of 12% created the difference between the
increased pre-tax income and after-tax decrease to income.
Net income for the three months ended June 30, 1999 was $769,000, compared to
$752,000 for the three months ended June 30, 1998. This represents a 2%
increase in net income for the two periods. Pre-tax operating income for the
three month period also increased over the three months ended June 30, 1998.
Pre-tax income in the second quarter increased by 8% to $1,133,000. Income
taxes increased by 23% compared to 1998, when tax advantages related to an
exercise of stock options provided tax benefits, to partially offset this
operational increase.
Net interest income increased $180,000 for the six months ended June 30, 1999
over the same period for 1998. This represents a 3% increase from prior year.
Interest rates on assets and liabilities were significantly lower during the
first six months of 1999 than 1998. This had an effect of reducing both the
rates at which assets generated income as well as reducing the interest expense
paid on deposits and other liabilities. Despite the general reduction in
interest rates during the interim time between these periods, increasing loan
balances and their greater percentage in the mix of assets, enabled the net
interest margin to increase to 6.14% from 5.67%. The three months ended June 30,
1999 provided $142,000 of the year-to-date increase in net interest income and
was 4% more than was earned in the same period in 1998.
Interest income for the six months ended June 30, 1999 decreased $904,000
over the six months ended June 30, 1998. Of this decrease, approximately
$649,000 is attributed to a decrease in the average volume of earning assets.
Average earning assets for the first six months of 1999 are $14,254,000, or
6%, less than 1998. The reduction in the average rate earned on assets, which
went from 9.33% to 9.13% for the six month period, decreased interest income
by $255,000. A favorable trend exists, however, in the percentage of average
loans to total average earning assets, which has increased to 85% from 76% in
the first half of 1998. The average rate of return on assets decreased 20
basis points, even though the average loan rate decreased 57 basis points and
investments decreased 38 basis points. The overall rate benefited from a
greater balance of loans, which offer a higher rate than investments.
Interest income for the three months ended June 30, 1999 was $317,000 lower
than the same period in the previous year.
Total interest expense for the six months ended June 30, 1999 decreased
$1,064,000, or 23%, from the comparable period of the prior year. Just as a
general reduction in interest rates affected interest earned on assets, it also
reduced the cost of funds on the liability side. In fact, the reduced cost of
funds were even more pronounced than the decrease in interest earned both in
terms of dollars and in rates. Of the total reduction in interest expense,
$556,000 could be attributed to the reduction in the cost of funds. The average
rate of expense for deposits and borrowings in the first half of 1999 decreased
to 3.67% from 4.21% in the same period in 1998, a reduction of 54 basis points
on the average rate of interest expense. The remaining decrease in interest
expense of $508,000 was a result of lower levels of average liabilities. Total
interest expense for the three months ended June 30, 1999 were $449,000 lower
than the second quarter of 1998.
Net interest margin, defined as net interest income as a percentage of average
earning assets, increased by 47 basis points to 6.14% from 5.67% in the first
half of 1998.
As interest rates have risen during 1999, particularly during the second
quarter, the attractiveness of refinancing mortgages has been reduced. The
effect of the increases in mortgage interest rates has been to reduce the
relative demand for refinancing that existed in 1998 and consequently the
volume of loans originated in 1999.
Non-interest income has decreased by $77,000, or 3%, from the first half of
1998. The primary reason for this decrease is the $56,000 difference in
mortgage loan originations fees discussed previously. The three months ended
June 30, 1999 accounted for $53,000 of this difference as interest rates
increased the most during this period. Service charges on deposit accounts
are also $19,000 less than in the first half of 1998, however, the second
quarter exceeded prior year slightly. Total non-interest income for the three
months ended June 30, 1999 decreased 5% to $1,165,0000 from the same period
in 1998.
Non-interest expenses for the first half of 1999 increased by $54,000, or less
than 1%, over the first half of 1998. Total non-interest expense for the second
quarter of 1999 were virtually the same as those of the prior year. Increased
expenses for advertising and marketing account for entire increase of $47,000 in
the other expense category. The salary and benefits expense increase of $27,000
represents a less than 1% increase from 1998. The ratio of non-interest expense
to average assets increased to 5.97% for the six months ended June 30, 1999 from
5.60% in 1998. The ratio of net overhead (non-interest expense minus
non-interest income) divided by average total assets increased to 4.11% for the
six months ended June 30, 199 from 3.78% for the same period in 1998.
10
<PAGE>
YEAR 2000 ISSUES
The century date change for the Year 2000 is a serious issue that may impact
virtually every organization, including FCFG. Many software programs are not
able to recognize the year 2000, since most programs and systems were designed
to store calender years in the 1900s by assuming the "19" and storing only the
last two digits of the year. The problem is especially important to financial
institutions since many transactions, such as interest accruals and payments,
are date sensitive, and because FCFG and the Bank interact with numerous
customers, vendors and third party service providers who must also address the
Year 2000 issue. The problem is not limited to computer systems. Year 2000
issues will also potentially affect every system that has an embedded microchip,
such as automated teller machines, elevators and vaults.
FCFG'S STATE OF READINESS
FCFG and the Bank are committed to addressing Year 2000 issues in a prompt and
responsible manner, and have dedicated resources to do so. Management has
completed an assessment of its automated systems and has implemented a program
consistent with applicable regulatory guidelines, to complete all steps
necessary to resolve identified issues. FCFG's compliance program has several
phases, including (1) project management; (2) assessment; (3) testing; and (4)
remediation and implementation.
PROJECT MANAGEMENT. FCFG has formed a Year 2000 compliance committee consisting
of senior management and departmental representatives. Planning for Year 2000
compliance began in 1997, with a formal committee being formed in early 1998. A
Year 2000 compliance plan was developed and regular meetings have been held to
discuss the process, assign tasks, determine priorities and monitor progress.
The committee regularly reports to the Company's Board.
ASSESSMENT. All of FCFG's and its subsidiary bank's computer equipment and
mission critical software programs have been identified. This phase is complete.
FCFG's primary software vendors were also assessed during this phase, and
vendors who provide mission critical software have been contacted. FCFG has
obtained written certification from providers of material services that such
providers are, or will be, Year 2000 compliant. Based upon its ongoing
assessment of the readiness of its vendors, suppliers and service providers,
FCFG is developing contingency plans addressing the most likely worst case
scenarios. FCFG will continue to monitor and work with these vendors. FCFG has
also identified, and began working with, the subsidiary bank's significant
borrowers and funds providers to assess the extent to which they may be affected
by Year 2000 issues.
TESTING. Updating and testing of FCFG and the Bank's automated systems are
continuing. All testing of mission critical systems has been completed. Testing
of non-mission critical systems will be complete by September 30, 1999. Upon
completion, FCFG will be able to identify and resolve any internal computer
systems that remain non-compliant.
REMEDIATION AND IMPLEMENTATION. This phase involves obtaining and implementing
renovated software applications provided by FCFG's vendors. As these
applications are received and implemented, FCFG will test them for Year 2000
compliance. This phase also involves upgrading and replacing automated systems
where appropriate, and this was substantially complete June 30, 1999.
ESTIMATED COSTS TO ADDRESS FCFG'S YEAR 2000 ISSUES
The total financial effect that Year 2000 will have on FCFG cannot be predicted
with any certainty at this time. In fact, in spite of all efforts being made to
rectify these problems, the success of FCFG's efforts will not be fully known
until the year 2000 actually arrives. However, based on its initial assessment
to date, FCFG does not believe that expenses related to meeting Year 2000
challenges will have a material effect on the operations or consolidated
financial condition of FCFG. Year 2000 challenges facing vendors of mission
critical software and systems, and facing FCFG's customers, could have a
material effect on the operations or consolidated financial condition of FCFG,
to the extent such parties are materially effected by such challenges.
RISKS RELATED TO YEAR 2000 ISSUES
The year 2000 poses certain risks to FCFG and the Bank and their operations.
Some of these risks are present because FCFG purchases technology and
information systems applications from other parties who face Year 2000
challenges. Other risks are inherent in the business of banking or are risks
faced by many companies. Although it is impossible to identify all possible
risks that FCFG may face moving into the millennium, management has identified
the following significant potential risks:
11
<PAGE>
FCFG lends significant amounts to businesses in its market area, If these
businesses are adversely effected by the Year 2000 problems, their ability to
repay loans could be impaired. This increased credit risk could adversely effect
FCFG's financial performance. During the assessment phase of FCFG's Year 2000
program, each of the Bank's substantial borrowers were identified, and the
Bank is working with such borrowers to ascertain their levels of exposure to
Year 2000 problems. To the extent that the Bank is unable to assure itself of
the Year 2000 readiness of such borrowers, it intends to apply additional risk
assessment criteria to the indebtedness of such borrowers and make any
necessary related adjustments to FCFG's provision for loan losses.
FCFG and the Bank, like many other companies, can be adversely effected by the
Year 2000 triggered failures of other companies upon whom FCFG and the Bank
depend for the functioning of their automated systems. Accordingly, FCFG's and
the Bank's operations could be materially effected if the operations of mission
critical third party service providers are adversely effected. As described
above, FCFG has identified its mission critical vendors and is monitoring their
Year 2000 compliance programs and is developing contingency plans.
FCFG'S CONTINGENCY PLANS
FCFG is in the process of developing specific contingency plans related to Year
2000 issues. As FCFG and the Bank continue the testing phase, and based on
future ongoing assessment of the readiness of vendors, service providers and
substantial borrowers, FCFG is developing appropriate contingency plans that
address the most likely "worst case" scenarios. Certain circumstances, as
described above in "RISKS", may occur for which there are no completely
satisfactory contingency plans.
12
<PAGE>
FIRST COMMUNITY FINANCIAL GROUP, INC.
PART II - OTHER INFORMATION
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule
(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: August 16, 1999 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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