<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No. )
Filed by the Registrant /X/
Filed by a party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Section 240.14a-11(c) or Section
240.14a-12
FIRST COMMUNITY FINANCIAL GROUP, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/X/ No fee required
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(1)
and 0-11
(1) Title of each class of securities to which transaction applies:
------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
------------------------------------------------------------------------
(5) Total fee paid:
------------------------------------------------------------------------
/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
------------------------------------------------------------------------
(3) Filing Party:
------------------------------------------------------------------------
(4) Date Filed:
------------------------------------------------------------------------
<PAGE>
FIRST COMMUNITY FINANCIAL GROUP, INC.
721 College Street, S.E.
P.O. Box 3800
Lacey, WA 98509-3800
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
NOTICE IS HEREBY GIVEN that, pursuant to the call of its directors, the regular
Annual Meeting of Shareholders of First Community Financial Group, Inc. will be
held at Cavanaughs, 2300 Evergreen Park Drive, Olympia, Washington on Tuesday,
May 4, 1999, at 6:00 p.m., for the purpose of considering and voting upon the
following matters:
1. ELECTION OF DIRECTORS. To elect two Directors for a term of three years
expiring in the year 2002, or until their successors have been elected and
qualified.
2. APPROVAL OF 1999 EMPLOYEE STOCK OPTION PLAN. To approve a stock option
plan for key employees of the Company, which will replace the current plan
that expires in April 1999.
3. WHATEVER OTHER BUSINESS may properly be brought before the meeting or any
adjournment of the meeting.
Only those shareholders of record at the close of business on March 24, 1999,
will be entitled to notice of, and to vote at the meeting.
By Order of the Board of Directors
Lacey, Washington James F. Arneson
April 2, 1999 Secretary
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IMPORTANT: THE PROMPT RETURN OF PROXIES WILL SAVE FCFG THE EXPENSE OF FURTHER
REQUESTS FOR PROXIES. YOU ARE URGED TO SIGN AND RETURN THE ENCLOSED PROXY
PROMPTLY. IF YOU DO ATTEND THE MEETING, YOU MAY THEN WITHDRAW YOUR PROXY. ANY
PERSON GIVING A PROXY MAY REVOKE IT PRIOR TO ITS EXERCISE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
FIRST COMMUNITY FINANCIAL GROUP, INC.
721 COLLEGE STREET, S.E.
P.O. BOX 3800 (98509-3800)
LACEY, WA 98503
PROXY STATEMENT
DATE, TIME AND PLACE OF MEETING. This Proxy Statement and the accompanying Proxy
are being first sent to shareholders on or about April 2, 1999, for use in
connection with the Annual Meeting of Shareholders ("Annual Meeting") of First
Community Financial Group, Inc. ("FCFG" or "Company") to be held on Tuesday, May
4, 1999. Only those shareholders of record at the close of business on March 24,
1999 ("Record Date"), will be entitled to vote. The number of shares of FCFG's
common stock, $2.50 value ("Common Stock"), outstanding and entitled to vote at
the Annual Meeting is 2,139,918.
SOLICITATION OF PROXIES. The enclosed Proxy is solicited by and on behalf of the
Board of Directors of FCFG and the cost of solicitation will be borne by FCFG.
Solicitation may be made by directors and officers of FCFG and its subsidiary,
First Community Bank ("FCB" or "Bank"), either by use of the mail, by telephone,
facsimile or personal interview. FCFG does not expect to pay any compensation
for the solicitation of proxies.
QUORUM. The presence, in person or by proxy, of at least a majority of the total
number of outstanding shares of Common Stock entitled to vote is necessary to
constitute a quorum at the Annual Meeting. Abstentions will be counted as shares
present and entitled to vote at the Annual Meeting for purposes of determining
the presence of a quorum. Broker non-votes will not be considered shares present
and will not be included in determining whether a quorum is present.
VOTING ON MATTERS PRESENTED. If the enclosed Proxy is duly executed and received
in time for the meeting, it is the intention of the persons named in the Proxy
to vote the shares represented by the Proxy FOR the two nominees listed in this
Proxy Statement and FOR the adoption of the stock option plan, unless otherwise
directed. Any proxy given by a shareholder may be revoked before its exercise by
written notice to FCFG, by a subsequently dated proxy, or in open meeting prior
to the taking of the shareholder vote. The shares represented by properly
executed, unrevoked proxies will be voted in accordance with the specifications
in the Proxy. Shareholders have one vote for each share of Common Stock held,
including the election of directors. Shareholders are not entitled to cumulate
their votes in the election of directors.
ELECTION OF DIRECTORS
GENERAL
FCFG's Bylaws provide that the number of directors must fall within a range of 5
and 15, the exact number to be determined by resolution of the Board of
Directors. The present size of the board has been fixed at six (6) directors.
The Bylaws also provide that the Board of Directors may increase the number of
directors by not more than two (2) between shareholders' meetings, and may fill
the vacancies created by doing so, provided that the number of directors shall
at no time exceed fifteen (15).
Directors are elected separately for the six Board positions. The two nominees
for election as Directors at the Annual Meeting who receive the highest number
of affirmative votes will be elected.
If you abstain from voting either by Proxy or in person at the Annual Meeting,
you will effectively vote "AGAINST" a nominee, because your votes cannot be
deemed voted "FOR" a nominee. In addition, "broker non-votes" will have no
effect because they are not considered "shares present" for voting purposes.
Proxies cannot be voted for more than two nominees.
1
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Directors are elected for a term of three years and until their successors have
been elected and qualified. FCFG's Articles of Incorporation require that the
terms of the directors be staggered such that approximately one-third of the
directors are elected each year. In accordance with this requirement, the Board
of Directors has nominated Messrs. DeTray and Murphy for election as directors
for three-year terms to expire in the year 2002. John D. Durney, whose term
would have expired at the Annual Meeting retired from the Board during 1998. The
Board of Directors has no present knowledge that any of the nominees will refuse
or be unable to serve. If either of Messrs. DeTray and Murphy should refuse or
be unable to serve, your proxy will be voted for those persons subsequently
designated by the Board of Directors to replace any or all nominees.
Other nominations, if any, may be made only in accordance with the prior notice
provisions contained in the Company's Articles of Incorporation. These notice
provisions require, among other things, that a shareholder provide the Company
with written notice not less than 14 days nor more than 60 days prior to the
Annual Meeting (or, if the Company provides less than 21 days notice of meeting,
no later than 7 days after the notice was mailed).
INFORMATION WITH RESPECT TO NOMINEES AND DIRECTORS WHOSE TERMS CONTINUE
The following table sets forth certain information with respect to the nominees
for director and for directors whose terms continue. The table includes their
ages, their principal occupations during the past five years, and the year in
which they were first elected a director of FCFG or predecessor corporations.
The table also indicates the number of shares of Common Stock beneficially owned
by each individual on January 1, 1999 and the percentage of Common Stock
outstanding that the individual's holdings represented on that date. However,
where beneficial ownership was less than one percent of all outstanding shares,
the percentage is not reflected in the table. Except as noted below, each holder
has sole voting and investment power with respect to the shares of Common Stock
listed as owned.
NOMINEES FOR DIRECTOR FOR THREE YEAR TERM EXPIRING IN 2002
(CLASS III DIRECTORS)
<TABLE>
<CAPTION>
SHARES & PERCENTAGE OF
PRINCIPAL OCCUPATION COMMON STOCK
NAME, AGE AND OF DIRECTOR DURING BENEFICIALLY OWNED
TENURE AS DIRECTOR LAST FIVE YEARS AS OF JANUARY 1, 1999
- ------------------ ------------------- ---------------------
<S> <C> <C>
E. Paul DeTray, 65 President, DeTray's Quality Homes 134,473(1)
Director since 1979 6.32%
Michael N. Murphy, 56 Washington State Deputy Auditor 17,810(2)
Director since 1978
</TABLE>
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THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE "FOR" ALL
OF THE DIRECTOR NOMINEES
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- -------------------
(1) Includes 50,532 shares held jointly with spouse; 18,753 shares held by
DeTray's Quality Homes; 12,850 held by the DeTray Family Partnership;
33,429 unallocated shares held by the KSOP, considered beneficially
owned by Mr. DeTray as Trustee for the KSOP; and 11,705 shares which
could be acquired within 60 days by the exercise of stock options.
(2) Includes 4,667 shares which could be acquired within 60 days by the
exercise of stock options.
2
<PAGE>
<TABLE>
<CAPTION>
DIRECTORS WITH TERM EXPIRING IN 2000
(CLASS I DIRECTORS)
SHARES & PERCENTAGE OF
PRINCIPAL OCCUPATION COMMON STOCK
NAME, AGE AND OF DIRECTOR DURING BENEFICIALLY OWNED
TENURE AS DIRECTOR LAST FIVE YEARS AS OF JANUARY 1, 1999
- ------------------ --------------- ---------------------
<S> <C> <C>
Patrick L. Martin, 60 President, Patrick's Decorating 44,503(4)
Director since 1980 Center(3) 2.09%
Ken F. Parsons, 53 Chairman, President & CEO, FCFG 224,979(5)
Director since 1979 and FCB 10.58%
</TABLE>
<TABLE>
<CAPTION>
DIRECTORS WITH TERM EXPIRING 2001
(CLASS II DIRECTORS)
SHARES & PERCENTAGE OF
PRINCIPAL OCCUPATION COMMON STOCK
NAME, AGE AND OF DIRECTOR DURING BENEFICIALLY OWNED
TENURE AS DIRECTOR LAST FIVE YEARS AS OF JANUARY 1, 1999
- ------------------ --------------- ---------------------
<S> <C> <C>
A. Richard Panowicz, 54 President, Archives Northwest(6) 85,770(7)
Director since 1995 4.03%
Kenneth M. Wilcox, 69 Retired Pharmacist 49,589(8)
Director since 1979 2.33%
</TABLE>
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(3) Mr. Martin also serves as director of Carpet Co-op of America, d/b/a
Carpet One, and Leading Edge Marketing, both public companies which
have a class of securities registered under Section 12 or subject to
the requirements of Section 15(d) of the Securities Exchange Act of
1934.
(4) Includes 15,160 shares held jointly with spouse; 4,442 shares held in
an IRA account for the Benefit of Mr. Martin; 1,244 shares held in IRA
account for the benefit of Mr. Martin's wife; and 11,705 shares which
could be acquired within 60 days by the exercise of stock options.
(5) Includes 72,668 shares held jointly with spouse; 1,767 held in an IRA
account for the benefit of Mr. Parsons; 1,148 shares held in an IRA for
the benefit of Mrs. Parsons; 28,150 shares held in the KSOP for the
benefit of Mr. Parsons; 606 shares held jointly by Mrs. Parsons and
their son; 486 shares held jointly by Mrs. Parsons and their daughter;
33,429 unallocated shares held by the KSOP, considered beneficially
owned by Mr. Parsons as trustee for the KSOP; and 86,725 shares which
could be acquired within 60 days by the exercise of stock options.
(6) Mr. Panowicz also serves as a member of the Board of The Office
Planning Group, Inc., a public company which has a class of securities
registered under Section 12 or subject to the requirements of Section
15(d) of the Securities Exchange Act of 1934.
(7) Includes 18,370 shares held jointly with spouse; 4,410 shares held in a
Charitable Remainder Trust, jointly with spouse; 12,744 shares held in
an IRA account for the benefit of Mr. Panowicz; 1,481 shares held in an
account for the benefit of his mother-in-law; 33,429 unallocated shares
held by the KSOP of which Mr. Panowicz is a trustee; and 11,705 shares
which could be acquired within 60 days by the exercise of stock
options.
(8) Includes 34,927 shares held jointly with spouse; 2,957 shares held in
an IRA account for the benefit of Mr. Wilcox; and 11,705 shares which
could be acquired within 60 days by the exercise of stock options.
3
<PAGE>
INFORMATION REGARDING THE BOARD OF DIRECTORS AND ITS COMMITTEES
BOARD OF DIRECTORS
The Board of Directors of FCFG generally meets on a quarterly basis with
additional meetings as necessary. There were five (5) meetings of the Board of
Directors of FCFG during 1998. All directors attended more than 75% of such
meetings and of all committee meetings of which they were members.
COMMITTEES
The Board of Directors of FCFG and the Bank have established certain standing
committees, including an Executive Committee (that also serves as the Personnel
and Compensation Committee) and an Audit Committee. There is presently no
standing Nominating Committee.
EXECUTIVE COMMITTEE/COMPENSATION COMMITTEE. The Executive Committee also acts as
the Personnel and Compensation Committee ("Compensation Committee") The
Executive Committee is authorized, to the extent permitted by law, to act on
behalf of the Board of Directors on all matters that may arise between regular
meetings of the Board upon which the Board of Directors would be authorized to
act. The Compensation Committee's purpose is to review and propose the
compensation to be paid to Mr. Parsons, and to review compensation ranges and
benefit plans provided other employees. Current members of the respective
committees are Messrs. DeTray (Chairman), Martin, Panowicz, and Parsons. There
were eight (8) meetings of the Executive Committee. Mr. Parsons does not
participate in matters related to his own compensation.
AUDIT COMMITTEE. The Audit Committee's function is to meet with management, the
internal auditors and the independent auditors to review and evaluate the
Company's audited financial statements, internal accounting controls, regulatory
examinations and compliance with laws, regulations and corporate policy. Current
members of the committee are Messrs. Panowicz (Chairman), DeTray, Murphy, Wilcox
and Jewell Manspeaker (who is a member of the board of directors of the Bank).
There were five (5) meetings of the Audit Committee during 1998.
DIRECTOR COMPENSATION
DIRECTOR AND COMMITTEE FEES. FCFG has an established program for director
compensation in which each director of FCFG receives an annual retainer fee of
$2,400, a board meeting attendance fee of $350 per board meeting and a committee
meeting fee of $175 per meeting. Directors of the Bank also receive an annual
retainer of $2,400, a board meeting attendance fee of $350 per meeting, and a
committee meeting fee of $175 per meeting.
DEFERRED COMPENSATION AGREEMENTS. In 1992, the Company entered into deferred
compensation agreements with four directors of FCB. The agreements allowed the
directors, at their option, to defer regular monthly Board fees for five years.
PERFORMANCE BASED FEES. A performance based fee schedule plan was implemented in
1992 under which, in addition to the base fees, directors receive fee
adjustments based on FCFG's annual performance as measured by return on assets.
Directors were each paid a $1,000 performance based fee in February 1999 for
1998 performance.
DIRECTOR STOCK OPTION PLAN. On April 19, 1994 the shareholders approved the 1994
STOCK OPTION PLAN FOR NON-EMPLOYEE DIRECTORS ("1994 Plan") which authorized the
grant of options to purchase shares of Common Stock to non-employee directors.
The 1994 Plan supplements the previously approved 1989 and 1992 Stock Option
Plans for Non-Employee Directors ("1989/1992 Plans"). The exercise price of the
options granted under the respective plans must be not less than the greater of
the book value or market value at the time of grant, and options have a term of
not more than ten years from the date of grant. At
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<PAGE>
December 31, 1998, options to purchase 86,830 shares remained granted and
unexercised under the 1994 Plan and 1989/1992 Plans, and 52,246 shares remain
available for future grant under the 1994 Plan.
EXECUTIVE COMPENSATION
SUMMARY
The following table sets forth a summary of certain information concerning the
compensation awarded to or paid by FCFG and/or the Bank for services rendered in
all capacities during the last three fiscal years to executive officers. No
other executive officer of FCFG or any of FCFG's significant subsidiaries earned
in excess of $100,000 during the last fiscal year.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
- -----------------------------------------------------------------------------------------------------------------------
Long Term Compensation
------------------------------------------------ -----------------------------------
Annual Compensation Awards Payouts
------------------------------------------------ ----------------------- -----------
Other Securities
Annual Restricted Underlying All Other
Name and Principal Compensa- Stock Options/ LTIP Compen-
Position Salary Bonus tion($) Awards SARs(#) Payouts sation($)(3)
Year ($)(1) ($) ($) (2) ($)
- --------------------- ---------- ------------ ----------- ------------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
KEN F. PARSONS 1998 $183,175 $70,438 $0 0 0 0 $9,600
Chairman, 1997 $163,200 $18,000 $0 0 0 0 $9,000
President, & 1996 $130,203 $33,789 $0 0 100,000 0 $9,900
CEO-FCFG and FCB
- --------------------- ---------- ------------ ----------- ------------ ----------- ----------- ----------- -----------
JAMES F. ARNESON 1998 $ 88,250 $36,628 $0 0 0 0 $5,627
EVP/CFO, Secretary 1997 $ 81,000 $ 6,000 $0 0 21,000 0 $5,152
and Treasurer of 1996 $ 69,758 $11,698 $0 0 0 0 $4,904
FCFG and FCB
- --------------------- ---------- ------------ ----------- ------------ ----------- ----------- ----------- -----------
JON M. JONES 1998 $ 76,286 $28,175 $0 0 0 0 $4,019
EVP and Chief 1997 $ 70,484 $ 0 $0 0 10,500 0 $3,234
Lending Officer of 1996 $ 59,905 $ 3,656 $0 0 0 0 $2,990
FCB
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</TABLE>
(1) Includes salary and any fees paid as a director for participation in
Board and committee meetings. Amount does not include deferred salary
and deferred director fees totaling $4,800 for 1998, $8,100 for 1997
and $11,750 for 1996 for Mr. Parsons.
(2) Consists of awards granted pursuant to FCFG's Employee Stock Option and
Restricted Stock Award Plan.
(3) Includes amounts paid by FCFG pursuant to the Company's Employee Stock
Ownership Plan with 401(k) Provisions.
STOCK OPTIONS
STOCK OPTION GRANTS. No options were granted to the executive officers named in
the compensation table during the year ended December 31, 1998.
STOCK OPTION EXERCISES. The following table sets forth certain information
concerning exercises of stock options pursuant to the FCFG's stock option plans
by the executive officers named in the compensation table during the year ended
December 31, 1998 and stock options held at year end.
5
<PAGE>
<TABLE>
<CAPTION>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND YEAR END OPTION VALUES
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- ----------------------------------------------------------------------------------------------------------------------
Shares Number of Value of
Acquired Value Unexercised Unexercised Options at
Name on Exercise Realized (1) Options at Year End Year end (2)
------------------------------- -------------------------------
Exercisable Unexercisable Exercisable Unexercisable
- --------------------- ---------------- --------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Ken F. Parsons 1,653 $ 30,370 86,725 70,971 $1,122,510 $802,693
12,119 $ 260,133
1,652 $ 36,959
- --------------------- ---------------- --------------- --------------- --------------- --------------- ---------------
James F. Arneson 2,000 $ 28,020 15,813 20,203 $ 186,355 $142,092
- --------------------- ---------------- --------------- --------------- --------------- --------------- ---------------
Jon M. Jones 0 0 7,326 9,190 $ 93,680 $ 58,272
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Reflects the amount realized from the aggregate of the current market
price of the Common Stock less the exercise price.
(2) On December 31, 1998, the estimated market price of the Common Stock
was $28.00. For purposes of the foregoing table, stock options with an
exercise price less than that amount are considered to be
"in-the-money" and are considered to have a value equal to the
difference between this amount and the exercise price of the stock
option multiplied by the number of shares covered by the stock option.
EMPLOYMENT AGREEMENTS
KEN F. PARSONS. On September 1, 1996, FCFG entered into an employment agreement
with Mr. Parsons, President, Chief Executive Officer and Director of FCFG, and
Chief Executive Officer and Director of the Bank. The agreement has an
eight-year term, subject to renewal. FCFG may terminate the agreement at any
time for cause without incurring any post-termination obligation to Mr. Parsons,
or without cause with severance benefits of between thirty-six months' and
forty-eight months' salary continuation. If Mr. Parsons terminates his
employment for any reason within twelve months of a change in majority control
of FCFG, then the agreement provides the same severance benefits. Mr. Parsons is
generally prohibited from competing with FCFG in its market area for at least
twelve months following termination for any reason. The non-compete period is
increased to thirty-six months following termination by FCFG without cause or by
Mr. Parsons with good reason. The agreement provides that upon retirement, Mr.
Parsons will receive a continuing service consulting fee based upon annual cash
compensation and years of serving FCFG.
JAMES F. ARNESON. Effective March 1, 1998, FCFG and FCB entered into an
employment agreement with Mr. Arneson, Executive Vice President, Chief Financial
Officer, Secretary and Treasurer of FCFG and FCB. The agreement has a two year
term, subject to renewal. FCFG may terminate the agreement at any time for cause
without incurring any post-termination obligation to Mr. Arneson, or with out
cause with severance benefits of 12 months' salary continuation. If Mr. Arneson
terminates his employment for any reason within twelve months of a change in
majority control of FCFG, then the agreement provides severance benefits of 24
months' salary continuation. Mr. Arneson is generally prohibited from competing
with FCFG in its market area for at least twelve months following termination
for any reason.
EMPLOYEE COMPENSATION PLANS
EXECUTIVE SUPPLEMENTAL INCOME PLAN
In 1992, the Company adopted an Executive Supplemental Income Plan ("ESIP")
covering a senior group of management personnel. The post-retirement benefit
provided by the ESIP is designed to supplement a participating officer's
retirement benefits from social security, in order to provide the officer with a
certain percentage of final average income at retirement age. Additionally, the
ESIP provides a pre-retirement
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<PAGE>
death benefit. These benefits are funded by life insurance policies owned by
the Company covering the lives of participants.
EMPLOYEE STOCK OPTION AND RESTRICTED STOCK AWARD PLAN
In 1989, Shareholders of FCFG approved an Employee Stock Option and Restricted
Stock Award Plan ("Plan"). The purpose of the Plan is to provide additional
incentives to selected eligible key officers of FCFG and its subsidiaries with
the intention of (i) attracting and retaining the best available personnel for
positions of responsibility with the Company and its subscribers, (ii) promoting
the success of the business activities of the Company, and (iii) increasing
shareholder value. The incentives are in the form of options to purchase shares
of Common Stock and/or restricted stock awards of Common Stock. The Company has
the first right of refusal to purchase any shares issued under the Plan prior to
being sold on the open market. At December 31, 1998, options covering 297,796
shares were granted and unexercised under the plan, and 34,975 shares remain
available for future grant.
Under the terms of the Plan, the exercise price of option shares will be fair
market value of the shares on the date the option is granted. All options
granted in accordance with the Plan are incentive options under Section 422A of
the Internal Revenue Code, and are exercisable over a ten (10) year period from
the date of the grant. The shareholders will be asked to approve an employee
stock option plan that will replace the existing Plan expiring April 1999. See
"Proposal No. 2 - 1999 Employee Stock Option Plan."
EMPLOYEE STOCK OWNERSHIP PLAN
FCFG provides retirement benefits to eligible employees through an Employee
Stock Ownership Plan that includes Internal Revenue Code 401(k) provisions (the
"KSOP"). The KSOP was adopted as a 401(k) plan in 1987, and restated in 1992 to
add employee stock ownership plan provisions. Eligible employees may defer up to
15% of their annual compensation in a pre-tax basis subject to certain IRS
limits. Under the terms of the Plan, the Company contributes one-half the
employees' contributions, up to 3% of the employees' compensation. Profit
sharing contributions to the Plan may also be made at the discretion of the
Board of Directors.
All funds in the KSOP are held in trust. The KSOP is administered by a Board of
Trustees that consist of Messrs. Arneson, DeTray, Panowicz and Parsons.
Investment of employee contributions to the KSOP are directed by the employee
into a combination the Company's Common Stock and a number of mutual and money
market funds. The investment of Company contributions to the KSOP are generally
invested in shares of the Company's Common Stock, although the Trustees have the
discretion to invest in such other prudent investments as deemed appropriate.
Upon retirement or termination of employment, a participant is entitled to
receive all Employer Basic Contributions, Employee Salary Reductions and
Rollover Contributions. The participant will also be eligible to withdraw
Employer Optional and Matching Contributions contributed by FCFG from profits,
subject to a vesting schedule. A participant becomes fully vested in five years,
with vesting of 20% each year after the first year of participation.
Contributions to the KSOP for the year ended December 31, 1998 was $334,000.
INCENTIVE COMPENSATION PLAN
Incentive compensation is awarded to officers and qualified employees based on
the financial performance of the Company. Awards are payable if the Company
meets earnings and growth objectives.
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<PAGE>
REPORT OF COMPENSATION COMMITTEE
The report of the Personnel and Compensation Committee (the "Committee") is
intended to describe in general terms the process the Committee undertakes and
the factors it considers in determining the appropriate compensation for FCFG
executive officers, including the executive officers who are named in the
summary compensation table (the "Named Executives").
RESPONSIBILITIES AND COMPOSITION OF THE COMMITTEE
The Committee is responsible for (i) establishing and monitoring compensation
programs for executive officers of FCFG and its subsidiaries; (ii) administering
and maintaining such programs in a manner that will benefit the long-term
interests of FCFG and its shareholders; and (iii) determining the compensation
of the Chief Executive Officer, while the Chief Executive Officer evaluates the
performance of the other executive officers and recommends individual
compensation levels for approval by the Committee. Current members of the
Committee are Messrs. Martin, DeTray, and Panowicz. None of the members of the
Committee are officers or employees of FCFG or the Bank.
COMPENSATION PHILOSOPHY
The Committee's compensation philosophy is intended to reflect and support the
goals and strategies that FCFG has established. Currently, FCFG's growth
strategy is to expand the market share of markets currently served and to enter
new markets within Southwest Washington . The key elements of this strategy are
increased market penetration, geographic expansion, loan portfolio growth,
development of innovative new product offerings, expanding the banking
relationship with each customer and maintenance of asset quality. The Committee
believes these goals, which are intended to create long-term shareholder value,
must be supported by a compensation program that:
- attracts and retains highly qualified executives;
- provides levels of compensation that are competitive with those
offered by other financial institutions;
- motivates executives to enhance long-term shareholder value by helping
them to build their own ownership in FCFG; and
- integrates FCFG's long-term strategic planning and measurement
processes.
COMPONENTS OF COMPENSATION PROGRAM
FCFG's compensation program for executives consists of three key elements: (i)
base salary; (ii) a performance-based annual bonus; and (iii) periodic grants of
options and other stock-based compensation.
The Committee believes that this three-part approach best serves the interests
of FCFG and its shareholders. It enables FCFG to meet the requirements of the
highly competitive banking environment in which it operates, while ensuring that
executive officers are compensated in a way that advances both the short and
long-term interests of shareholders. The variable annual bonus permits
individual performance to be recognized and is based, in significant part, on an
evaluation of the contribution made by the officer to FCFG's overall
performance. Options and other stock-based compensation relate a significant
portion of long-term remuneration directly to stock price appreciation realized
by FCFG's shareholders, and further serve to promote an executive's continued
service to the organization.
BASE SALARY. Base salaries for FCFG's executive officers are based upon
recommendations by the Chief Executive Officer, taking into account such factors
as competitive industry salaries, an executive's scope
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<PAGE>
of responsibilities, and individual performance and contribution to the
organization. The Chief Executive Officer reviews all salary recommendations
with the Committee, which then approves or disapproves such recommendations.
ANNUAL INCENTIVE. Executive officers have an annual incentive (bonus)
opportunity with awards based on the overall performance of FCFG. The
performance targets may be based on one or more of the following criteria:
growth in assets, return on assets and return on equity.
FCFG's Chief Executive Officer determines the annual incentive pool at the
commencement of each fiscal year. The size of the pool is based upon an
assessment of FCFG's targeted performance as compared to previous year financial
performance and the financial performance of other peer financial institutions.
The Chief Executive Officer makes individual incentive recommendations to the
Committee, within the limits of the pool, for eligible employees based upon an
evaluation of their individual performance and contribution to FCFG's overall
performance. If at the end of the fiscal year, FCFG's performance meets the
targets that have been established, the incentives established at the beginning
of the year are recommended to the Committee for approval. If actual performance
is either higher or lower than the target, recommended incentives are adjusted
upward or downward, accordingly.
STOCK OPTION AND OTHER STOCK-BASED COMPENSATION
Equity-based compensation is intended to more closely align the financial
interests of FCFG's executives with long-term shareholder value, and to assist
in the retention of executives who are key to the success of FCFG and its
subsidiaries. Equity-based compensation has taken the form of incentive stock
options pursuant to FCFG's existing stock option plans. The Committee determines
from time to time which executives, if any, will receive stock options and
determines the number of shares subject to each option. Grants of stock options
are based on various subjective factors relating primarily to the
responsibilities of individual executives, their past and expected future
contributions to FCFG and prior option grants.
CHIEF EXECUTIVE OFFICER COMPENSATION
The base compensation for FCFG's President and Chief Executive Officer, Ken F.
Parsons, was determined by the Committee with final approval by the Board of
Director's of FCFG based on the same criteria as the compensation for the other
executive officers. FCFG entered into an eight-year employment agreement with
Mr. Parsons on September 1, 1996 (see "Employment Agreements"). The Chief
Executive Officer's bonus potential is based on achievement of certain targeted
results of the Company (for fiscal 1998, with respect to the Company's return on
average assets) and is determined by the Committee with final approval by the
Board of Directors. Mr. Parsons did not participate in matters relating to his
own compensation.
CONCLUSION
The Committee believes that for the 1998 fiscal year, the compensation for Mr.
Parsons, as well as for the other executive officers, were consistent with
FCFG's overall compensation philosophy and clearly related to the realization of
FCFG's goals and strategies for the year. The Committee also notes that return
to shareholders, as evidenced by the Stock Performance Graph measurement of
FCFG's performance against its industry group, is further evidence of what the
Committee considers to have been highly satisfactory performance by the named
executive and other executive officers during the 1998 fiscal year.
Respectfully submitted by Committee members:
E. PAUL DETRAY - PATRICK L. MARTIN - RICHARD PANOWICZ
KEN F. PARSONS (PRESIDENT AND CEO OF FCFG AND THE BANK)
9
<PAGE>
STOCK PERFORMANCE GRAPH
The following line graph compares the total cumulative shareholder return on the
Bank's Common Stock, based on quarterly reinvestment of all dividends, to the
cumulative total returns of the Standard & Poor's S&P Composite 500 Index and
the Nasdaq Banking Index. The graph assumes $100 invested on December 31, 1993,
in the Bank's Common Stock and each of the indices.
[GRAPHIC OMITTED]
<TABLE>
<CAPTION>
PERIOD ENDING
- --------------------------------------------------------------------------------------------------------------------------
INDEX 12/31/93 12/31/94 12/31/95 12/31/96 12/31/97 12/31/98
- ----------------------------------- ------------- ------------- -------------- -------------- --------------- ------------
<S> <C> <C> <C> <C> <C>
FCFG $100.00 $126.84 $144.38 $166.75 $194.99 $233.98
S&P 500 $100.00 $ 98.46 $132.05 $158.80 $208.05 $263.53
NASDAQ - BANKS $100.00 $101.11 $146.42 $184.71 $302.17 $266.60
</TABLE>
10
<PAGE>
OWNERSHIP OF FCFG COMMON STOCK
The following table provides certain information with respect to persons, other
than directors of the Company, known to the Company to own more than five
percent beneficial ownership of its Common Stock at January 1, 1999, and
information regarding executive officers and directors as a group. The address
for all persons listed is the same address as that of the Company.
<TABLE>
<CAPTION>
Name, Relationship with Number of Shares Percent of Class
FCFG Beneficially Owned Beneficially Owned
- ----------------------- ------------------ ------------------
<S> <C> <C>
5% SHAREHOLDER
FCFG Employee Stock 542,099(1) 25.50%
Ownership Plan ("KSOP")
DIRECTORS AND EXECUTIVE OFFICERS
Directors and Executive Officers as a 510,880(2) 24.03%
group(7)
</TABLE>
- -----------------
(1) In addition to the 33,429 unallocated shares held by the KSOP, includes
101,044, 191,550, 20,614, and 52,341 beneficially owned by Messrs.
DeTray, Parsons, Arneson and Panowicz, respectively, solely as trustees
of the KSOP, over which the KSOP disclaims beneficial ownership.
(2) Includes 33,429 unallocated shares held by the KSOP which are
considered beneficially owned by Messrs. DeTray, Parsons, Panowicz and
Arneson. Also includes options for 154,025 shares owned by directors
and management, which are exercisable within 60 days of December 31,
1998.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During 1998 many directors and executive officers of FCFG and the Bank and their
associates were also customers of the Bank. It is anticipated that directors,
executive officers, and their associates will continue to be customers of the
Bank in the future. The Bank has had, and expects to have in the future, banking
transactions in the ordinary course of its business with directors, officers,
principal shareholders and their associates, on substantially the same terms,
including interest rates and collateral, as those prevailing at the same time
for comparable transactions with others and which do not involve more than the
normal risk of collectability or present other unfavorable features.
KENNETH WILCOX LOAN. In April, 1993, Mr. Kenneth Wilcox, a director of FCFG and
FCB, loaned $450,000 to IMS, a wholly owned subsidiary that was owned by FCFG
(and subsequently merged into FCFG) for the purpose of acquiring data processing
equipment to be used by IMS in its business. The term of the loan was five
years, and on August 4, 1998, the outstanding amount due under this obligation
was paid in full.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
FCFG has adopted procedures to assist its directors and executive officers with
Section 16(a) of the Securities Exchange Act, which includes assisting the
officer or director in preparing forms for filing with the Securities Exchange
Commission. Based on the review of such forms, FCFG believes that all of its
executive officers and directors complied with all filing requirements
applicable to them.
11
<PAGE>
PROPOSAL NO. 2 - APPROVAL OF 1999 EMPLOYEE STOCK OPTION PLAN
On February 18, 1999, the Board of Directors approved the 1999 Employee Stock
Option Plan (the "1999 Employee Plan"), subject to shareholder approval. If
approved, no further options will be granted under the existing Plan. The
purpose of the 1999 Employee Plan is to aid in retaining and attracting
competent employees, and to provide an incentive to employees to improve the
performance of the Company. The material features of the 1999 Employee Plan are
summarized below.
PARTICIPANTS. The 1999 Employee Plan provides for the issuance of nonqualified
stock options("NQSOs") and incentive stock options ("ISOs"), from time to time,
to employees of the Company.
ADMINISTRATION OF THE PLAN. A maximum of 40,000 shares of Common Stock are
reserved for issuance under the 1999 Employee Plan, which will be administered
by the Board of Directors (or a committee of the Board).
GRANT AND PRICE OF OPTIONS. The Board of Directors (or a committee of the Board)
will determine the terms and conditions of the options granted under the 1999
Employee Plan, including the price, the date or conditions on which the options
become exercisable and the termination date (subject to the terms of the plan).
The 1999 Employee Plan provides that the exercise price of any option granted
under the Plan may be no less than the greater of the fair market value or net
book value of the stock at the date the option is granted. The exercise price of
an ISO may not be less than the fair market value of the Common Stock at the
date the option is granted, and in some cases must be at least 110% of such fair
market value. No option may in any event be exercisable more than ten years from
the date of the grant of such option, and under certain circumstances ISOs may
not be exercisable more than five years from the date of grant.
FEDERAL TAX TREATMENT. The 1999 Employee Plan provides for the issuance of
options which qualify as "incentive stock options" within the meaning of Section
422 of the Internal Revenue Code of 1986, and nonqualified stock options.
Holders of ISOs incur no tax (and the Company is not entitled to a deduction) on
the grant or exercise of such options. When stock received upon exercise of an
ISO is sold, the holder incurs tax at capital gain rates. In order to qualify
under Section 422, ISOs are subject to a number of restrictions, including the
following: (i) the option price may not be less than the fair market value of
the stock at the time the option is granted, and (ii) the market value of the
stock for which an employee's incentive stock options become exercisable in any
year may not exceed $100,000.
TERMINATION AND AMENDMENT OF PLAN. The Board of Directors may terminate the 1999
Employee Plan at any time without shareholder approval. The Board of Directors
may amend the 1999 Employee Plan at any time; PROVIDED, HOWEVER, that
shareholder approval is required to increase the number of shares of Common
Stock authorized for issuance under the 1999 Plan.
- --------------------------------------------------------------------------------
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE BY STOCKHOLDERS FOR
APPROVAL OF THE 1999 EMPLOYEE STOCK OPTION PLAN. THE AFFIRMATIVE VOTE OF THE
HOLDERS OF A MAJORITY OF THE SHARES OF COMMON STOCK PRESENT IN PERSON OR BY
PROXY AT THE ANNUAL MEETING IS REQUIRED TO APPROVE THIS PROPOSAL.
- --------------------------------------------------------------------------------
AUDITORS
The firm of Knight, Vale & Gregory Inc. P.S. performed the audit of the
consolidated financial statements for FCFG and its wholly owned subsidiaries,
for the year ended December 31, 1998.
12
<PAGE>
OTHER MATTERS
The Board of Directors knows of no other matters to be brought before this
Annual Meeting. However, if other matters should properly come before the
meeting, it is the intention of the persons named in the Proxy to vote the Proxy
in accordance with the recommendations of management on such matters.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's discussion and analysis of the Company should be read in
conjunction with the accompanying consolidated financial statements. This
analysis compares 1998 results and financial position with that of 1997 and
1996.
FORWARD-LOOKING INFORMATION
Statements appearing in this report which are not historical in nature,
including the discussions of the effects of recent mergers and the adequacy of
the Company's capital resources, are forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking
statements are subject to the risks and uncertainties that may cause actual
future results to differ materially. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the date of
this Proxy Statement. FCFG does not undertake any obligation to publicly release
any revisions to forward-looking statements contained in this Proxy Statement,
with respect to events or circumstances after the date of this Proxy Statement,
or to reflect the occurrence of unanticipated events.
Such risks and uncertainties with respect to the Company include those related
to the economic environment, particularly in the region in which the Company
operates, competitive products and pricing, fiscal and monetary policies of the
federal government, changes in government regulations affecting financial
institutions, including regulatory fees and capital requirements, changes in
prevailing interest rates, acquisitions and the integration of acquired
businesses, credit risk management and asset/liability management, the financial
and securities markets, and the availability of and costs associated with
sources of liquidity.
PERFORMANCE OVERVIEW
In 1998 the Company achieved record annual earnings of $3,605,000. The 1998
results compare favorably to the net income recorded for 1997, when the Company
focused on growth of the organization through the acquisition of Prairie
Security Bank and four branches from Wells Fargo Bank, as well as 1996. As a
result of the growth in 1997, and its short term impact on earnings for that
year, net income increased by 401% over 1997 net income of $719,000, and by 94%
over 1996 net income of $1,861,000.
Basic earnings per share for 1998 was $1.74 per share as compared to $.36 per
share for 1997 and $1.01 per share for 1996. Return on average assets increased
to 1.26% in 1998 from .29% and 1.08% in 1997 and 1996 respectively. Return on
average total equity also increased to 12.61% from 2.76% in 1997 and 9.30% in
1996. The 1997 results were affected by significant charges related to the
Company's acquisitions and costs associated with the repurchase of stock
options.
The accompanying "Summary of Operations Analysis" is presented as a supplement
to the consolidated statement of income. This table should not be viewed as a
substitute for the generally accepted accounting principle-based financial
statements presented elsewhere in this report. Management believes that the
analysis is meaningful to understand the results and trends in operating income
separately from nonrecurring transactions, non-core activities and certain
provisions. There are three primary differences between the consolidated
statement of income and the operating income analysis. First, the line items are
presented in a slightly different order. Second, certain transactions that are
13
<PAGE>
nonrecurring or that are not related to what management believes is core
business are not included in non-interest income and non-interest expenses in
determining operating income. Finally, operating income is income before the
provision for credit losses, non-core items and income taxes.
The provision for credit losses is deducted from operating income as its amount
is based on the analysis of the required level of the allowance for possible
credit losses and can be subject to fluctuation due to the prevailing level of
charge-offs. Due to the format of this presentation, the line items may not
agree directly to the Consolidated Financial Statements. For detailed
information on the items presented as non-core, refer to the respective
discussions of "Non-interest Income" and "Non-interest Expenses".
SUMMARY OF OPERATIONS ANALYSIS
<TABLE>
<CAPTION>
(THOUSANDS) 1998 1997 1996
<S> <C> <C> <C>
Net interest income $ 14,727 $ 13,121 $ 9,622
Non-interest income 5,032 3,293 2,049
Non-interest expenses (14,061) (13,216) (8,606)
---------- --------- ---------
Operating income 5,698 3,198 3,065
Provision for credit losses (425) (1,015) (261)
Non-core items
Merger and integration costs (391) (968) --
Asset write-down (36) (140) (225)
Repurchase of stock options -- (1,133) --
Life insurance income -- 1,110 --
Officer survivor benefits -- (379) --
Other -- (187) --
--------- ---------- ------------
(427) (1,697) (225)
Income before income taxes 4,846 486 2,579
--------- --------- ---------
(Provision) Benefit for income taxes (1,241) 233 (718)
---------- --------- ---------
Net income $ 3,605 $ 719 $ 1,861
---------- --------- ---------
---------- --------- ---------
</TABLE>
Operating income for 1998 increased $2,500,000, or 78% from 1997. Highlights
for the period include:
- Net interest income increased $1,606,000, or 12%. The growth in net
interest income was the result of a greater average volume of loans and
investment securities in 1998 than in previous years.
- Non-interest income increased $1,739,000, or 53% over 1997. The
increase reflected the growth in origination of mortgage loans, gains
on sales of loans and assets, service charges on deposit accounts, and
other fee income.
- Non-interest expenses increased $845,000, or 6%. This was the result of
the costs associated with having a full year of operation of the larger
branch structure created in 1997, including facilities and personnel
costs.
- The reduction in provision for credit losses in 1998 from 1997
primarily reflected the impact of the 1997 integration of the loan
portfolio of Prairie Security Bank.
14
<PAGE>
RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income in 1998 increased by $1,606,000, or 12%, from 1997. The net
interest margin decreased 12 basis points from 5.98% to 5.86%.
Total interest income increased by $2,252,000 over 1997 to $23,412,000.
Increases in average asset balances in 1998 accounted for $2,630,000 of the
increase while the comparable interest income was reduced by $378,000 due to a
reduction in interest rates earned resulting from market conditions. The
earnings effect of the 8% increase in average loan balances exceeded the impact
of declining yields by $990,000. Interest income from investment securities
increased $1,566,000 from 1997 to 1998. Of this increase, $1,490,000 resulted
from the increased average balance in securities, and $76,000 resulted from a
higher yield obtained on the portfolio. Despite the increased yield on the
investment portfolio, the yield on total earning assets decreased because in
1998 the loan portfolio represented a smaller proportion of total earning
assets. In 1998, the loan portfolio accounted for 77% of the total average
earning assets, as opposed to 1997 when the relationship was 82%. Reduced
balances maintained in Federal funds sold and interest bearing deposits provided
$304,000 less income in 1998 than 1997.
Interest expense in 1998 increased $646,000 over 1997. The average balance of
interest bearing deposits increased 13% during the year. This had the effect of
raising interest expense by $689,000. However a reduction in interest rates paid
during the period served to offset the volume increases by $182,000. The
increase in borrowed balances less the effect of a reduced average rate on the
type of borrowings had a net effect of increased interest expense of $139,000.
The effective rate paid on deposits and borrowed funds declined by 22 basis
points to 4.09%.
An analysis of the change in net interest income is as follows (THOUSANDS):
<TABLE>
<CAPTION>
1998 compared to 1997 1997 compared to 1996
Increase (decrease) due to Increase (decrease) due to
Volume Rate Net Volume Rate Net
<S> <C> <C> <C> <C> <C> <C>
Interest earned on:
Loans $1,473 $(483) $990 $5,064 $(260) $4,804
Federal funds sold and deposits in (333) 29 (304) 311 (19) 292
banks
Investment securities 1,490 76 1,566 702 84 786
Total interest income 2,630 (378) 2,252 6,077 (195) 5,882
Interest paid on:
Savings, NOW and MMA 588 (80) 508 931 (128) 803
Time deposits 101 (102) (1) 1,545 (10) 1,535
Other borrowings 161 (22) 139 63 (18) 45
Total Interest expense 850 (204) 646 2,539 (156) 2,383
Net interest income $1,780 $(174) $1,606 $3,538 $(39) $3,499
</TABLE>
The change in interest due to both rate and volume has been allocated to volume
and rate changes in proportion to the relationship of the absolute dollar
amounts of the change in each.
15
<PAGE>
Average consolidated statements of financial position and analysis of net
interest spread were as follows (dollars in thousands):
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
Interest Interest Interest
Average Income Average Average Income Average Average Income Average
Balance (Expense) Rates Balance (Expense) Rates Balance (Expense) Rates
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Earning Assets:
Loans(1) $194,016 $19,811 10.21% $179,396 $18,821 10.49% $131,185 $14,017 10.68%
Federal funds sold and
interest bearing deposits
in banks 9,529 532 5.58% 15,484 836 5.40% 9,735 544 5.59%
Investment securities 47,930 3,069 6.40% 24,606 1,503 6.11% 13,005 717 5.51%
Total earning assets and
interest income 251,475 23,412 9.31% 219,486 21,160 9.64% 153,925 15,278 9.93%
------- ------ ------- ------ ------- ------
Other Assets:
Cash and due from banks 12,178 10,907 9,150
Bank premises and equipment 10,312 10,173 7,480
Other assets 15,329 11,725 3,641
Allowance for credit losses (2,276) (1,954) (1,417)
Total Assets $287,018 $250,337 $172,779
------- ------- -------
------- ------- -------
- -------------------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders'
Equity
Interest bearing liabilities:
Deposits:
Savings, NOW, and
Money Market Deposits $112,779 $(3,091) 2.74% $91,220 $(2,584) 2.83% $58,616 $(1,781) 3.04%
Time deposits 95,273 (5,299) 5.56% 93,457 (5,300) 5.67% 66,201 (3,765) 5.69%
------ ----- ------ ------- ------ -------
Total interest bearing deposits $208,052 (8,390) 4.03% $184,677 (7,884) 4.27% $124,817 (5,546) 4.44%
Other borrowings 4,269 (295) 6.91% 1,863 (155) 8.32% 1,137 (110) 9.67%
----- --- ----- ----- ------- -----
Total interest bearing
liabilities
and interest expense 212,321 (8,685) 4.09% 186,540 (8,039) 4.31% 125,954 (5,656) 4.49%
------- ----- ------- ------- ------- -------
Non-interest bearing deposits 44,468 35,685 26,320
Other liabilities 1,640 2,076 490
Stockholder equity 28,589 26,036 20,015
------ ------ ------
Total liabilities,
stockholders' equity
and net interest income $287,018 $14,727 $250,337 $13,121 $172,779 $9,622
-------- ------- -------- ------- -------- ------
-------- ------- -------- ------- -------- ------
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income as an
average
of earnings assets:
Interest Income 9.31% 9.64% 9.93%
Interest Expense 3.45% 3.66% 3.67%
----- ----- -----
Net Interest Income 5.86% 5.98% 6.25%
----- ----- -----
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) For purposes of these computations, non-accrual loans are included in the
average loan balance outstanding. Loan fees and late charges of
$1,902,000, $1,991,000 and $1,440,000 are included in interest income in
1998, 1997 and 1996.
16
<PAGE>
NON-INTEREST INCOME
Total non-interest income increased by $733,000 to $4,996,000 over the 1997
amount of $4,263,000. Increased origination fees on mortgage loans of $521,000,
or 69% was the primary factor for increased non-interest income. Service charges
on deposit accounts increased $321,000, or 20% to $1,931,000. Other non-interest
income increased by $995,000 from 1997 to $1,788,000. This increase was led by
$431,000 in gains on sales of real properties and the consumer credit card
portfolio. Increased revenues from the financial services division amounted to
$321,000. The remainder was increases in other miscellaneous fees and charges.
NON-INTEREST EXPENSE
Non-interest expense, excluding non-core items, increased to $14,061,000 from
$13,216,000 in 1997, an increase of 6%. Increases in general operating expenses
reflected 1997 growth. Total compensation expense increased by $313,000, or 4%.
Facility operation costs increased $218,000 as additional locations were
operational for the full year in 1998. Equipment costs decreased slightly from
1997. The ratio of non-interest expense, excluding non-core items, as a percent
of average total assets for the year decreased to 4.90% from 5.28% in 1997.
<TABLE>
<CAPTION>
1998 1997 1996
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
NONINTEREST EXPENSES
Salaries and benefits $ 7,864 $ 7,551 $4,544
Occupancy 1,091 807 618
Equipment 1,239 1,305 835
Other 3,867 3,553 2,609
------- ------- ------
14,061 13,216 8,606
NONCORE EXPENSE ITEMS
Merger and integration costs 391 968 --
Officer survivor benefits -- 379 --
Repurchase of stock options -- 1,133 --
Other -- 187 --
------- ------- ------
391 2,667 --
$14,452 $15,883 $8,606
</TABLE>
NON-CORE NON-INTEREST EXPENSE ITEMS. In connection with the acquisition of
Prairie Security Bank and the four Wells Fargo Bank branches, merger and
integration costs of $968,000 were incurred in 1997. These costs were incurred
primarily for employee severance, professional fees, costs to eliminate
redundant computer systems, administrative functions and premises and equipment.
Included in this amount is $207,000 of goodwill amortization from the Prairie
Security Bank acquisition and $83,000 of core deposit premium amortization from
the Wells Fargo Bank branch acquisition for 1997. Similar expenses for 1998
included $190,000 of goodwill amortization and $201,000 of core deposit premium
amortization.
In 1997, the Company repurchased stock options from two former executives of
Northwest Community Bank, necessitating the recognition of $1,133,000 in
compensation and related settlement costs.
17
<PAGE>
In connection with the Bank's Executive Supplemental Income plan of which John
R. Johnson, Sr., a Bank officer, was a participant, the Bank recognized costs in
1997 for survivor benefits and related costs upon his death in the amount of
$379,000.
FINANCIAL CONDITION
OVERVIEW
Consolidated total assets decreased 8% or $22,908,000 to $271,566,000. This was
led by a decline in time certificate of deposit balances, as the Bank endeavored
to improve the mix of deposits in favor of non-interest bearing demand accounts.
Loan balances decreased slightly, one quarter of one percent, to $194,361,000.
As a percentage of total assets, loans increased from 66% in 1997 to 72% in 1998
and the ratio of loans to deposits climbed from 75% at the end of 1997 to 83% at
year-end 1998.
INVESTMENTS
The Company's investment portfolio decreased 15% to $36,095,000. The decrease in
investments coincides with the decrease in deposits. As deposits dropped and
loan balances remained steady, the investment portfolio and short term cash
equivalents were decreased. Included in the portfolio are securities classified
as "held-to-maturity", which are recorded at an amortized cost of $677,000, as
well as securities classified as "available-for-sale", which are recorded at
their fair value of $35,418,000. Because the available-for-sale portfolio is
carried at fair value, its carrying value fluctuates with changes in market
factors, primarily interest rates.
The carrying amount of securities and the approximate fair values were as
follows (dollars in thousands):
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
Available-for-Sale Securities
December 31, 1998
Equity Securities $ 2,009 $ -- $ -- $ 2,009
U.S. Government and agency securities 15,578 114 255 15,437
Corporate Securities 1,444 14 -- 1,458
Mortgage backed securities 11,144 63 7 11,200
State and municipal securities 5,200 120 6 5,314
$ 35,375 $ 311 $ 268 $ 35,418
December 31, 1997
Equity securities $ 2,709 $ -- $ -- $ 2,709
U.S. Government and agency securities 22,042 98 26 22,114
Corporate securities 4,657 4 2 4,659
Mortgage backed securities 8,649 8 32 8,625
State and municipal securities 3,498 54 1 3,551
$ 41,555 $ 164 $ 61 $ 41,658
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
December 31, 1996
Equity securities $ 2,053 $ -- $ -- $ 2,053
U.S. Government and agency securities 3,557 6 27 3,536
Corporate securities 855 -- 1 854
Mortgage backed securities 745 -- 11 734
State and municipal securities 323 13 -- 336
$ 7,533 $ 19 $ 39 $ 7,513
Held-to-Maturity Securities
December 31, 1998
State and municipal securities $ 677 $ 58 $ 1 $ 734
December 31, 1997
State and municipal securities $ 959 $ 67 $ 2 $ 1,024
December 31, 1996
U.S. Government and agency securities $ 1,251 $ 4 $ -- $ 1,255
Corporate securities 251 -- -- 251
State and municipal securities 1,680 69 6 1,743
$ 3,182 $ 73 $ 6 $ 3,249
</TABLE>
The stated maturities of debt securities were as follows at December 31, 1998
(dollars in thousands):
<TABLE>
<CAPTION>
Held-to-Maturity Securities Available-for-Sale Securities
---------------------------- -----------------------------
Estimated Weighted Estimated Weighted
Amortized Fair Average Amortized Fair Average
Cost Value Yield Cost Value Yield
<S> <C> <C> <C> <C> <C>
Due in one year or less $ -- $ -- --% $2,140 $2,132 5.89%
Due after one year through five years 170 182 5.19% 6,421 6,503 6.51%
Due after five years through ten years 507 552 5.64% 9,986 10,071 5.97%
Due after 10 years -- -- --% 14,819 14,703 6.40%
$677 $734 $33,366 $33,409
</TABLE>
Mortgage backed securities are allocated based on their anticipated principal
repayment.
Gross realized gains and gross realized losses on sales of securities available
for sale were $11,000 and $5,000, respectively, for 1998.
LOANS
Loan balances declined by $500,000 to $194,361,000 in 1998. In the declining
interest rate environment experienced during the year, the Bank sought both to
minimize the decline in yield and to improve the credit quality of the
portfolio. As a result of these dual objectives, the Bank did not experience the
loan growth it had in previous years.
19
<PAGE>
The composition of the loan portfolio was as follows at December 31 (dollars in
thousands):
<TABLE>
<CAPTION>
1998 % of 1997 % of 1996 % of
Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio
<S> <C> <C> <C> <C> <C> <C>
Commercial $ 29,446 15.2% $ 36,995 19.0% $27,353 20.9%
Real estate construction 17,390 8.9% 24,423 12.5% 14,071 10.8%
Real estate mortgage 141,120 72.6% 124,954 64.1% 83,242 63.7%
Consumer 6,405 3.3% 8,489 4.4% 5,966 4.6%
$194,361 100.00% $194,861 100.00% $130,632 100.00%
</TABLE>
The Bank's loan portfolio is concentrated in real estate secured loans, which
comprise 81.5% of the portfolio in 1998. This percentage increased from 76.6% in
1997 and 74.5% in 1996.
The following table shows the maturity analysis of commercial and real estate
construction loans outstanding as of December 31, 1998 (dollars in thousands):
<TABLE>
<CAPTION>
After One
Within But Within After
One Year Five Years Five Years Total
<S> <C> <C> <C> <C>
Commercial $15,379 $10,172 $3,895 $29,446
Real estate construction 15,579 1,677 134 17,390
$30,958 $11,849 $4,029 $46,836
</TABLE>
Of these loans maturing after one year, $9,752,000 have predetermined, or fixed
interest rates and $6,127,000 have floating or adjustable interest rates.
DEPOSITS
Total deposits decreased by $27,534,000, or 10% from 1997 to $235,587,000. The
proportion of the demand deposits to total deposits increased to 19.8% in 1998
from 16.4% in 1997. Interest bearing demand deposits to total deposits also
increased by 3.2 percentage points and savings accounts percentage increased by
50 basis points. These increases offset the decrease in the percentage of time
deposits, the most expensive form of deposit. Since the average cost of time
deposit accounts is 270 basis points higher than interest bearing demand
accounts, 5.56% interest expense rate vs. 2.86%, and 319 basis points higher
than savings accounts, 5.56% compared to 2.37%, this shift in deposit mix serves
to decrease the Bank's cost of funds.
The Bank's deposits at December 31 are summarized as follows (dollars in
thousands):
<TABLE>
<CAPTION>
1998 1997 1996
Amount Percent Rate Amount Percent Rate Amount Percent Rate
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Demand Deposits $ 46,538 19.8 $ 43,245 16.4 $ 24,719 16.1
Interest bearing demand 84,427 35.8 2.86% 85,740 32.6 2.78% 42,541 27.7 3.09%
Savings Accounts 25,117 10.7 2.37% 26,743 10.2 2.92% 16,235 10.6 2.91%
Other time deposits 79,505 33.7 5.56% 107,393 40.8 5.67% 69,939 45.6 5.69%
$235,587 100.0 $263,121 100.0 $153,434 100.0
</TABLE>
20
<PAGE>
Certificates of deposit at December 31, 1998 are scheduled to mature as follows
(dollars in thousands):
<TABLE>
<CAPTION>
Under $100,000
$100,000 and over Total
<S> <C> <C> <C>
0-90 days $18,244 $ 4,575 $ 22,819
91-180 days 11,488 2,309 13,797
181-365 days 27,899 5,884 33,783
Over 1 year 7,809 1,297 9,106
$65,440 $14,065 $79,505
</TABLE>
ASSET QUALITY
Nonperforming assets consist of loans on which interest is no longer accrued,
accruing loans past due 90 days or more and foreclosed real estate and other
assets. Total nonperforming assets decreased 27% to $5,059,000 at December 31,
1998 from $6,937,000 at year-end 1997. This decrease is attributable to the
reduction in the non-accrual loans. The balance of these loans decreased by 43%,
or $1,889,000 to $2,492,000. Any anticipated losses on these loans have been
fully reserved for in the allowance for credit losses. The remainder of the
classes of non-performing assets decreased in aggregate by $11,000.
Nonperforming assets were as follows at December 31 (dollars in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Non-accrual loans $2,492 $4,381 $1,898
Accruing loans past due 90 days or more 471 319 1,238
Foreclosed real estate 2,096 2,105 1,063
Other assets 0 132 17
$5,059 $6,937 $4,216
</TABLE>
The gross interest income that would have been recorded in 1998 if the loans had
been current in accordance with their original terms and had been outstanding
throughout the period or since origination, if held for part of the period
amounts to $248,000. No interest income on those loans was included in net
income for 1998.
The Company is not aware of any loans continuing to accrue interest at December
31, 1998 that represent or result from trends or uncertainties which management
reasonably expects will materially impact future operating results, liquidity,
or capital resources, or represent material credits about which management is
aware of any information which would raise serious doubts as to the ability of
such borrowers to comply with the loan repayment terms.
ALLOWANCE FOR CREDIT LOSSES
The allowance for credit losses reflects management's current estimate of the
amount required to absorb losses on existing loans and commitments to extend
credit, as well as an additional amount to provide a supplementary margin of
safety. Determination of the appropriate level of the allowance is based on an
analysis of various factors including historical loss experience based on
volumes and types of loans; volumes and trends in delinquencies and non-accrual
loans; trends in portfolio volume; results of internal and independent external
credit reviews; and anticipated economic conditions. 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.
21
<PAGE>
Transactions in the allowance for credit losses for the years ended December 31,
1998, 1997 and 1996 are as follows (dollars in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Balance at beginning of year $2,122 $1,420 $1,376
Provision charged to non-interest expense 425 1,015 261
Transfer from Prairie Security Bank -- 469 --
Losses charged to allowance
Commercial (219) (627) (34)
Real Estate Mortgage (98) (69) (116)
Consumer (94) (111) (77)
--------- ------- -------
(411) (807) (227)
Recoveries credited to allowance 154 25 10
-------- ------ ------
Net charge-offs (257) (782) (217)
Balance at end of year $2,290 $2,122 $1,420
Ratio of net charge-offs to
Average Loans Outstanding .13% .44% .17%
</TABLE>
The balance of loans charged off decreased to $411,000 in 1998 from $807,000 in
1997. Recoveries of loans previously written off increased to $154,000 during
1998 from $25,000 in 1997.
In May 1993, the Financial Accounting Standards Board (FASB) issued SFAS No.
114, "Accounting by Creditors for Impairment of a Loan" and in October 1996,
issued SFAS No. 118, "Accounting by Creditors for Impairment of a Loan--Income
Recognition Disclosures, an amendment to SFAS No. 114". The Company measures
impaired loans based on the present value of expected future cash flows
discounted at the loan's effective interest rate or, as a practical expedient,
at the loan's observable market price or the fair market value of the collateral
if the loan is collateral dependent. The Company excludes loans that are
currently measured at fair value or at lower of cost or fair value, and certain
large groups of smaller balance homogeneous loans that are collectively measured
for impairment. At December 31, 1998, 1997 and 1996, the Company's recorded
investment in certain loans that were considered to be impaired was $2,492,000,
$4,381,000 and $1,898,000, respectively, all of which was classified as
nonperforming. Of these impaired loans, $1,238,000, $992,000 and $1,493,000 had
a related valuation allowance of $227,000, $139,000 and $132,000, for 1998,
1997, and 1996 respectively. No allocation of the allowance for credit losses
was considered necessary for the remaining impaired loans. The balance of the
allowance for credit losses in excess of these specific reserves is available to
absorb losses from all loans.
It is the Company's policy to charge-off any loan or portion of a loan that is
deemed uncollectible in the ordinary course of business. The entire allowance
for credit losses is available to absorb such charge-offs. The Company has
history to draw from regarding loan losses and therefore allocates its allowance
for credit losses primarily on the basis of historical occurrence. Based on
certain characteristics of the portfolio, losses can be anticipated for major
loan categories.
22
<PAGE>
In the following table, the allowance for possible credit losses at December 31,
1998, 1997 and 1996 has been allocated among major loan categories based on a
number of factors including quality, volume, economic outlook and other business
considerations (dollars in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
% of Total % of Total % of Total
Allowance Loans Allowance Loans Allowance Loans
<S> <C> <C> <C> <C> <C> <C>
Commercial Loans $576 15.2% $678 19.0% $ 412 20.9%
Real Estate Loans 1,633 81.5% 1,200 76.6% 887 74.5%
Consumer Loans 81 3.3% 244 4.4% 121 4.6%
Total Allowance $2,290 100.0% $2,122 100.0% $1,420 100.0%
</TABLE>
LIQUIDITY, RATE SENSITIVITY AND MARKET RISK
The Company's assets and liabilities are managed to maximize long-term
shareholder returns by optimizing net interest income within the constraints of
maintaining high credit quality, conservative interest rate risk disciplines and
prudent levels of liquidity. The Asset/Liability Committee meets regularly to
monitor the composition of the balance sheet, to assess current and projected
interest rate trends, and to formulate strategies consistent with established
objectives for liquidity, interest rate risk and capital adequacy.
Liquidity management involves the ability to meet cash flow requirements of
customers who may be either depositors wanting to withdraw funds or borrowers
needing assurance that sufficient funds will be available to meet their credit
needs. Liquidity is generated from both internal and external sources. Internal
sources are those assets that can be converted to cash with little or no risk of
loss. These include overnight investments in federal funds sold and investment
securities, particularly those of shorter maturity, and are the principal source
of asset liquidity. At December 31, 1998, cash, deposits in banks, Federal funds
sold and securities available for sale totaled $50,675,000. External sources
refer to the ability to attract new liabilities and capital. They include
increasing savings and demand deposits, federal funds purchased, and the
issuance of capital and debt securities. At December 31, 1998, overnight and
federal funds borrowing lines of credit totaled $19,075,000 and was used
occasionally during 1998. The Bank also has preestablished term borrowing lines
available with the Federal Home Loan Bank of approximately $15,675,000. This
credit facility has remained unused in 1998.
Management believes the Bank's liquidity position at December 31, 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
23
<PAGE>
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.
<TABLE>
<CAPTION>
Interest Rate Gap Analysis
December 31, 1998
After One
Within But Within After
(dollars in thousands) One Year Five Years Five Years Total
<S> <C> <C> <C> <C>
Loans $ 77,928 $90,216 $28,181 $196,325
Securities:
Available for sale 2,132 6,503 24,774 33,409
Held to maturity -- 170 507 677
Interest bearing deposits with banks 127 -- -- 127
Federal funds sold 2,815 -- -- 2,815
Total Earning Assets 83,002 96,889 53,462 233,353
Deposits:
Savings, NOW and money market 109,544 -- -- 109,544
Time certificates of deposit 70,400 9,093 12 79,505
Short-term borrowings 500 -- -- 500
Long-term debt 2,808 -- -- 2,808
Total Interest Bearing Liabilities 183,252 9,093 12 192,357
Net Interest Rate Sensitivity Gap ($100,250) $87,796 $53,450 $ 40,996
</TABLE>
The Company's market risk is impacted by changes in interest rates. Other types
of market risk, such as foreign currency exchange rate risk and commodity price
risk, do not arise in the normal course of the Company's business.
The Company has market risk in the form of interest rate risk on it's financial
assets. In an effort to understand the relative impact of this risk on the
Company's current financial situation, a process known as a rate shock is
applied to the current financial assets.
Rate shock is a process wherein the characteristics of the financial assets of
the Company are reviewed in the event they are subjected to an instantaneous and
complete adjustment in the market rate of interest. These results are modeled to
determine the effects on interest rate margin for the succeeding twelve months
from the repricing of variable rate assets and liabilities where applicable. The
level of impact on the various assets and liabilities are also estimated for
their sensitivity to pricing changes of such a market interest rate change.
The change in net interest margin in the event market interest rates were to
immediately rise or fall by 100 basis points is estimated to be $200,000. This
amount represents approximately 1.4% of the 1998 net interest income.
CAPITAL
Consolidated capital of FCFG increased $4,176,000 in aggregate during 1998. In
addition to net earnings of $3,605,000, significant changes to capital included
payments made on the guaranteed KSOP obligation, which added $338,000, and
additional capital through the exercising of stock options provided $277,000.
24
<PAGE>
There are regulatory constraints placed upon capital adequacy, and it is
necessary to maintain an appropriate ratio between capital and assets.
Regulations require banks and holding companies to maintain a minimum "leverage"
ratio (primary capital ratio) of total assets. For the most highly rated holding
companies this ratio must be at least 3%, and for others it must be 4 to 5%. At
December 31, 1998, the Company's leverage ratio was 8.59%, compared to 6.58% at
year-end 1997. For regulatory purposes, the associated goodwill and core deposit
premium is treated as a reduction of capital. In addition, holding companies are
required to meet minimum risk-based capital guidelines under which risk
percentages are assigned to various categories of assets and off-balance-sheet
items to calculate a risk-adjusted capital ratio. Tier I capital generally
consists of common stockholders' equity, less goodwill and other intangible
assets, while Tier II capital includes the allowance for possible loan losses,
subject to 1.25% limitation of risk-adjusted assets. The rules require Tier II
capital of 4% of risk-adjusted assets and total capital (combined Tier I and
Tier II) of 8%. At December 31, 1998, the Tier I capital ratio was 10.60%, and
total capital was 11.64%. The similar ratios at December 31, 1997 were a Tier I
capital ratio of 8.30% and a total capital ratio of 9.22%.
The following table sets forth certain operating and capital ratios for the
Company at December 31:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Return on Average Assets 1.26% .29% 1.08%
Return on Average Equity 12.61% 2.76% 9.30%
Average Equity to Average Assets Ratio 9.96% 10.40% 11.58%
</TABLE>
No cash dividends were paid in 1998, 1997 or 1996.
FUTURE OUTLOOK
The following statements are forward-looking and should be read in conjunction
with information contained in the section entitled "Forward-looking
Information".
Because of the rapid growth the Bank experienced in 1997 and prior years,
management focused significant efforts in 1998 at integrating acquired business,
and achieving the efficiencies made possible through the growth and
acquisitions. Consequently, 1998 earnings were significantly improved over
previous years, and growth of the Bank was restricted. Although the financial
effects of many of the efficiencies achieved were realized in 1998, some,
including the effects of branch closures which occurred during the fourth
quarter of 1998, will not be realized until 1999.
Management believes that some of the Bank's existing markets have significant
potential for further expansion, and is contemplating a strategy of expanding
the Bank's branch presence in those markets. While this is an important
long-term strategy in terms of increasing the Bank's market share and
maintaining earnings growth, it is expected to increase the Bank's operating
costs in the short-term.
The acquisition of established businesses has been an important strategy
employed by the Company for entering new markets and for further penetrating
existing markets. Although the Company is not currently active in seeking
acquisition candidates, the Company may become active in certain markets.
25
<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 calendar 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 is committed to addressing these Year 2000 issues in a prompt
and responsible manner, and they have dedicated the 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 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 banks' 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 is in
the process of obtaining 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 reasonably
likely worst case scenarios. FCFG will continue to monitor and work with these
vendors. FCFG has also identified, and began working with, the subsidiary banks'
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 is
currently underway. All testing of mission critical systems has been completed.
Testing of non-mission critical systems will be complete by June 30, 1999. Upon
completion, FCFG will be able to identify 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 is expected to be substantially complete by June 30,
1999.
ESTIMATED COSTS TO ADDRESS FCFG'S YEAR 2000 ISSUES
The total financial effect that Year 2000 issues 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
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
26
<PAGE>
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
affected 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:
FCFG lends significant amounts to businesses in its market area. If these
businesses are adversely affected by Year 2000 problems, their ability to repay
loans could be impaired. This increased credit risk could adversely affect
FCFG's financial performance. During the assessment phase of FCFG's Year 2000
program, each of the Banks 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 affected 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 Banks operations could be materially affected, if the operations of
mission-critical third party service providers are adversely affected. 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 reasonably likely "worst case" scenarios. Certain
circumstances, as described above in "RISKS," may occur for which there are no
completely satisfactory contingency plans.
FORWARD LOOKING STATEMENTS
The discussion above regarding to the century date change for the year 2000
includes certain "forward looking statements" concerning the future operations
of FCFG. FCFG desires to take advantage of the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995 as they apply to forward
looking statements. This statement is for the express purpose of availing FCFG
of the protections of such safe harbor with respect to all "forward looking
statements." Management's ability to predict results of the effect of future
plans is inherently uncertain, and is subject to factors that may cause actual
results to differ materially from those projected. Factors that could affect the
actual results include FCFG's success in identifying systems and programs that
are not Year 2000 compliant; the possibility that systems modifications will not
operate as intended; unexpected costs associated with remediation, including
labor and consulting costs; the nature and amount of programming required to
upgrade or replace the affected systems; the uncertainty associated with the
impact of the century change on FCFG and the Bank's customers, vendors and
third-party service providers; and the economy generally.
27
<PAGE>
INFORMATION CONCERNING SHAREHOLDER PROPOSALS
Proposals of shareholders intended to be presented at the Annual Meeting of
Shareholders of FCFG scheduled to be held May, 2000, must be received for
inclusion in the Proxy Statement and form of Proxy relating to that meeting by
December 27, 1999.
By Order of the Board of Directors
Lacey, Washington James F. Arneson
April 2, 1999 Secretary
- --------------------------------------------------------------------------------
IMPORTANT: THE PROMPT RETURN OF PROXIES WILL SAVE FCFG THE EXPENSE OF FURTHER
REQUESTS FOR PROXIES, YOU ARE URGED TO SIGN AND RETURN THE ENCLOSED PROXY
PROMPTLY. IF YOU DO ATTEND THE MEETING, YOU MAY THEN WITHDRAW YOUR PROXY. ANY
PERSON GIVING A PROXY MAY REVOKE IT PRIOR TO ITS EXERCISE.
- --------------------------------------------------------------------------------
<PAGE>
First
Community
Financial
Group
Inc.
and
Subsidiaries
CONSOLIDATED
FINANCIAL
REPORT
December 31
1998
<PAGE>
CONTENTS
- -------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT......................................... F-1
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets.......................................... F-2
Consolidated Statements of Income.................................... F-3
Consolidated Statements of Stockholders' Equity................ F-4 - F-5
Consolidated Statements of Cash Flows.......................... F-6 - F-7
Notes to Consolidated Financial Statements.................... F-8 - F-30
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
FIRST COMMUNITY FINANCIAL GROUP, INC.
Lacey, Washington
We have audited the accompanying consolidated balance sheets of FIRST COMMUNITY
FINANCIAL GROUP, INC. AND SUBSIDIARIES as of December 31, 1998 and 1997, and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the three years in the period ended December 31, 1998. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of FIRST COMMUNITY
FINANCIAL GROUP, INC. AND SUBSIDIARIES as of December 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1998, in conformity with generally accepted
accounting principles.
KNIGHT, VALE & GREGORY, INC., P.S.
January 15, 1999
Tacoma, Washington
F-1
<PAGE>
CONSOLIDATED BALANCE SHEETS
- -------------------------------------------------------------------------------
(Dollars in Thousands)
First Community Financial Group, Inc. and Subsidiaries
December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
ASSETS
Cash and due from banks $ 12,315 $ 11,620
Interest bearing deposits in banks 127 5,648
Federal funds sold 2,815 11,000
Securities available for sale 35,418 41,658
Securities held to maturity (fair value: 1998 - $734; 1997 - $1,024) 677 959
Loans held for sale 4,456 4,304
Loans 194,361 194,861
Allowance for credit losses (2,290) (2,122)
NET LOANS 192,071 192,739
Premises and equipment 9,474 10,683
Foreclosed real estate 1,996 2,105
Accrued interest receivable 1,120 1,491
Cash value of life insurance 2,959 3,159
Goodwill 7,493 7,884
Other assets 645 1,224
TOTAL ASSETS $271,566 $294,474
LIABILITIES
Deposits:
Demand $ 46,538 $ 43,245
Savings and interest-bearing demand 109,544 112,483
Time 79,505 107,393
TOTAL DEPOSITS 235,587 263,121
Short-term borrowings 500 --
Long-term debt 2,808 3,818
Accrued interest payable 297 403
Other liabilities 2,033 967
TOTAL LIABILITIES 241,225 268,309
COMMITMENTS AND CONTINGENT LIABILITIES -- --
STOCKHOLDERS' EQUITY
Preferred stock (no par value); 200,000 shares authorized, none issued -- --
Common stock (par value $2.50); 10,000,000 shares authorized,
shares issued: 2,126,147 - 1998; 1,995,426 - 1997 5,315 4,988
Surplus 22,849 20,459
Retained earnings 2,757 1,596
Accumulated other comprehensive income 28 68
Unearned KSOP shares (608) (946)
TOTAL STOCKHOLDERS' EQUITY 30,341 26,165
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $271,566 $294,474
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-2
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
- -------------------------------------------------------------------------------
(Dollars in Thousands, Except Per Share Data)
First Community Financial Group, Inc. and Subsidiaries
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
INTEREST INCOME
Loans $19,811 $18,821 $14,017
Federal funds sold and deposits in banks 532 836 544
Investment securities:
Taxable 2,799 1,339 579
Non-taxable 270 164 138
TOTAL INTEREST INCOME 23,412 21,160 15,278
INTEREST EXPENSE
Deposits 8,390 7,884 5,546
Other 295 155 110
TOTAL INTEREST EXPENSE 8,685 8,039 5,656
NET INTEREST INCOME 14,727 13,121 9,622
PROVISION FOR CREDIT LOSSES 425 1,015 261
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES 14,302 12,106 9,361
NON-INTEREST INCOME
Service charges on deposit accounts 1,931 1,610 1,105
Origination fees and gains on sales of loans 1,271 750 443
Life insurance proceeds -- 1,110 --
Gain on sale of securities available for sale 6 -- --
Other operating income 1,788 793 276
TOTAL NON-INTEREST INCOME 4,996 4,263 1,824
NON-INTEREST EXPENSES
Salaries 6,446 5,590 3,751
Employee benefits 1,418 1,961 793
Occupancy 1,091 807 618
Equipment 1,239 1,305 835
Repurchase of stock options -- 1,133 --
Other 4,258 5,087 2,609
TOTAL NON-INTEREST EXPENSES 14,452 15,883 8,606
OPERATING INCOME BEFORE INCOME TAXES 4,846 486 2,579
INCOME TAXES (BENEFIT) 1,241 (233) 718
NET INCOME $ 3,605 $ 719 $ 1,861
EARNINGS PER SHARE DATA
Basic earnings per share $1.74 $.36 $1.01
Diluted earnings per share 1.62 .34 .93
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-3
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- -------------------------------------------------------------------------------
(Dollars in Thousands)
First Community Financial Group, Inc. and Subsidiaries
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
ACCUMULATED
OTHER UNEARNED
COMMON RETAINED COMPREHENSIVE KSOP
STOCK SURPLUS EARNINGS INCOME SHARES TOTAL
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 $4,031 $12,311 $ 2,940 $(42) $ -- $19,240
Comprehensive income:
Net income -- -- 1,861 -- -- 1,861
Other comprehensive income,
net of tax:
Unrealized gain on securities -- -- -- 29 -- 29
COMPREHENSIVE INCOME -- -- 1,861 29 -- 1,890
Stock options exercised 14 31 -- -- -- 45
5% stock dividend 201 1,584 (1,796) -- -- (11)
Transfer to retained earnings -- (181) 181 -- -- --
Net increase in unearned
KSOP shares -- -- -- -- (245) (245)
BALANCE, DECEMBER 31, 1996 4,246 13,745 3,186 (13) (245) 20,919
Comprehensive income:
Net income -- -- 719 -- -- 719
Other comprehensive income,
net of tax:
Unrealized gain on securities -- -- -- 81 -- 81
COMPREHENSIVE INCOME -- -- 719 81 -- 800
Stock options exercised 44 159 -- -- -- 203
5% stock dividend 234 2,062 (2,309) -- -- (13)
Stock repurchased (306) (2,206) -- -- -- (2,512)
Stock issued for purchase of
Prairie Security Bank 770 6,699 -- -- -- 7,469
Net increase in unearned
KSOP shares -- -- -- -- (701) (701)
BALANCE, DECEMBER 31, 1997 4,988 20,459 1,596 68 (946) 26,165
</TABLE>
(CONTINUED)
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-4
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- -------------------------------------------------------------------------------
(CONCLUDED) (Dollars in Thousands)
First Community Financial Group, Inc. and Subsidiaries
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
ACCUMULATED
OTHER UNEARNED
COMMON RETAINED COMPREHENSIVE KSOP
STOCK SURPLUS EARNINGS INCOME SHARES TOTAL
<S> <C> <C> <C> <C> <C> <C>
Comprehensive income:
Net income $ -- $ -- $ 3,605 $ -- $ -- $ 3,605
Other comprehensive income,
net of tax:
Unrealized loss on securities,
net of reclassification
adjustment -- -- -- (40) -- (40)
COMPREHENSIVE INCOME -- -- 3,605 (40) -- 3,565
Stock options exercised 89 188 -- -- -- 277
5% stock dividend 248 2,182 (2,444) -- -- (14)
Stock repurchased (10) (70) -- -- -- (80)
Income tax benefit from exercise
of stock options -- 80 -- -- -- 80
Compensation expense for
issuance of stock options -- 10 -- -- -- 10
Net decrease in unearned
KSOP shares -- -- -- -- 338 338
BALANCE, DECEMBER 31, 1998 $5,315 $22,849 $2,757 $28 ($608) $30,341
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-5
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
- -------------------------------------------------------------------------------
(Dollars in Thousands)
First Community Financial Group, Inc. and Subsidiaries
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 3,605 $ 719 $ 1,861
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Provision for credit losses 425 1,015 261
Depreciation and amortization 1,296 1,231 772
Deferred income taxes (benefit) 327 (225) 16
Stock dividends received (129) (110) (81)
Amortization of goodwill 391 290 --
Life insurance proceeds -- 1,419 --
Origination of loans held for sale (55,868) (38,029) (18,966)
Proceeds from sales of loans held for sale 55,716 34,451 19,718
(Increase) decrease in cash value of life insurance 200 60 (438)
Gain on sale of foreclosed real estate (431) (11) (41)
(Increase) decrease in accrued interest receivable 371 (657) 151
Increase (decrease) in accrued interest payable (106) 174 (112)
Other - net 956 (675) (231)
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 6,753 (348) 2,910
CASH FLOWS FROM INVESTING ACTIVITIES
Net (increase) decrease in interest bearing deposits in banks 5,521 5,217 (1,250)
Net (increase) decrease in federal funds sold 8,185 (7,000) 1,841
Purchases of securities available for sale (37,246) (44,652) (2,360)
Proceeds from maturities of securities held to maturity 280 2,220 4,045
Proceeds from maturities of securities available for sale 39,698 15,164 2,093
Proceeds from sales of securities available for sale 4,416 -- --
Net increase in loans (2,176) (28,795) (5,910)
Proceeds from sales of foreclosed assets 2,745 258 572
Additions to premises and equipment (771) (2,324) (575)
Proceeds from sales of premises and equipment 746 -- --
Purchase of Prairie Security Bank, net of cash acquired -- (880) --
Deposit premium paid on branches purchased -- (2,997) --
Other - net (55) 293 33
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 21,343 (63,496) (1,511)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits (27,534) 68,842 (2,737)
Net increase in short-term borrowings 500 -- --
Proceeds from exercise of stock options 277 203 45
Proceeds from issuance of long-term debt -- 2,750 --
Repayment of long-term debt (550) (2,170) (188)
Repurchase of common stock (80) (2,512) --
Payment for fractional shares (14) (13) (11)
Other - net -- (103) --
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (27,401) 66,997 (2,891)
NET CHANGE IN CASH AND DUE FROM BANKS 695 3,153 (1,492)
CASH AND DUE FROM BANKS
Beginning of year 11,620 8,467 9,959
END OF YEAR $ 12,315 $ 11,620 $ 8,467
</TABLE>
(CONTINUED)
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-6
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
- -------------------------------------------------------------------------------
(CONCLUDED) (Dollars in Thousands)
First Community Financial Group, Inc. and Subsidiaries
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for:
Interest $ 8,791 $ 7,865 $ 5,768
Income taxes 865 320 805
SUPPLEMENTAL DISCLOSURES OF
NON-CASH INVESTING AND FINANCING ACTIVITIES
Foreclosed real estate acquired in settlement of loans $ 2,318 $ 1,222 $ 1,708
Financed sale of foreclosed real estate 53 -- --
Excess of cost over net assets acquired of Prairie Security Bank -- (5,177) --
Common stock issued for purchase of Prairie Security Bank -- 7,469 --
Stock dividends 2,430 2,296 1,785
Compensation expense for issuance of stock options 10 -- --
Fair value adjustment of securities available for sale, net (40) 81 29
Net increase (decrease) in unearned KSOP shares (338) 701 245
Income tax benefit from exercise of stock options 80 -- --
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
First Community Financial Group, Inc. and Subsidiaries
December 31, 1998 and 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
First Community Financial Group, Inc. (the Company) provides commercial banking
services in Washington State through 14 branches concentrated in and around
Thurston, Grays Harbor, Pierce and Lewis Counties. Additionally, the Company
provides real estate mortgage lending services and the sale of non-deposit
investment products through its branch network. The Company's primary source of
revenue is providing loans to customers who are predominately small and
middle-market businesses and middle-income individuals.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries, First Community Bank of Washington (FCB) and
Information Management Systems, Inc. (IMS). FCB is also referred to as "the
Bank." FCB Financial Services, Inc., a wholly owned subsidiary of FCB, is also
included in the consolidated financial statements. All significant intercompany
transactions and balances have been eliminated.
CONSOLIDATED FINANCIAL STATEMENT PRESENTATION
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles and practices within the banking
industry. The preparation of consolidated financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, and disclosure of contingent assets and liabilities, as of the date
of the balance sheet, and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ significantly from those
estimates.
Certain prior year amounts have been reclassified to conform to the 1998
presentation.
SECURITIES AVAILABLE FOR SALE
Securities available for sale consist of debt securities, which may be sold to
implement the Company's asset/liability management strategies, and in response
to changes in interest rates and similar factors, and certain equity securities.
Securities available for sale are reported at fair value. Unrealized gains and
losses, net of the related deferred tax effect, are reported in accumulated
other comprehensive income, a separate component of stockholders' equity.
Realized gains and losses on securities available for sale, determined using the
specific identification method, are included in earnings. Amortization of
premiums and accretion of discounts are recognized in interest income over the
period to maturity.
SECURITIES HELD TO MATURITY
Debt securities for which the Company has the positive intent and ability to
hold to maturity are reported at cost, adjusted for amortization of premiums and
accretion of discounts, which are recognized in interest income over the period
to maturity.
(CONTINUED)
F-8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
First Community Financial Group, Inc. and Subsidiaries
December 31, 1998 and 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LOANS HELD FOR SALE
Mortgage and government guaranteed loans originated for sale in the secondary
market are carried at the lower of cost or estimated market value. Net
unrealized losses are recognized through a valuation allowance established by
charges to income.
LOANS
Loans are stated at the amount of unpaid principal, reduced by an allowance for
credit losses. Interest on loans is accrued daily based on the principal amount
outstanding.
Generally the accrual of interest on loans is discontinued when, in management's
opinion, the borrower may be unable to meet payments as they become due or when
they are past due 90 days as to either principal or interest. When interest
accrual is discontinued, all unpaid accrued interest is reversed against current
income. If management determines that the ultimate collectibility of principal
is in doubt, cash receipts on nonaccrual loans are applied to reduce the
principal balance.
ALLOWANCE FOR CREDIT LOSSES
The allowance for credit losses is maintained at a level considered adequate to
provide for losses that can be reasonably anticipated. The allowance is
increased by provisions charged to operations and reduced by loans charged off,
net of recoveries. The allowance is based on management's periodic evaluation of
potential losses in the loan portfolio after consideration of historical loss
experience, adverse situations that may affect the borrowers' ability to repay,
the estimated value of any underlying collateral, economic conditions, the
results of examination of individual loans, the evaluation of the overall
portfolio by senior credit personnel and federal and state regulatory agencies,
and other risks inherent in the portfolio.
This evaluation requires the use of current estimates, which may vary from the
ultimate collectibility experienced in the future. The estimates used are
reviewed periodically, and, as adjustments become necessary, they are charged
to operations in the period in which they become known.
When management determines it is possible that a borrower will be unable to
repay all amounts due according to the terms of the loan agreement, including
scheduled interest payments, the loan is considered impaired. The amount of
impairment is measured based on the present value of expected future cash flows
discounted at the loan's effective interest rate or, when the primary source of
repayment is provided by real estate collateral, at the fair value of the
collateral less estimated selling costs. The amount of impairment and any
subsequent charges are recorded through the provision for credit losses as an
adjustment to the allowance for credit losses.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated depreciation, which
is computed on the straight-line method over the estimated useful lives of the
assets. Leasehold improvements are amortized over the term of the lease or the
estimated useful life of the improvement, whichever is less. Gains or losses on
dispositions are reflected in earnings.
(CONTINUED)
F-9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
First Community Financial Group, Inc. and Subsidiaries
December 31, 1998 and 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
GOODWILL
Goodwill represents costs in excess of net assets acquired (see Note 2), and is
amortized on a straight-line basis over a period of 15 to 25 years. The Company
periodically evaluates goodwill for impairment.
FORECLOSED REAL ESTATE
Real estate properties acquired through, or in lieu of, foreclosure are to be
sold and are initially recorded at the fair value of the properties less
estimated costs of disposal. Any write-down to fair value at the time of
transfer to foreclosed real estate is charged to the allowance for credit
losses. Properties are evaluated regularly to ensure that the recorded amounts
are supported by their current fair values, and that valuation allowances to
reduce the carrying amounts to fair value less estimated costs to dispose are
recorded as necessary. Additions to or reductions from valuation allowances are
recorded in income.
INCOME TAXES
Deferred tax assets and liabilities result from differences between the
financial statement carrying amounts and the tax bases of assets and
liabilities, and are reflected at currently enacted income tax rates applicable
to the period in which the deferred tax assets or liabilities are expected to be
realized or settled. The deferred tax provision represents the difference
between the net deferred tax asset/liability at the beginning and end of the
year. As changes in tax laws or rates are enacted, deferred tax assets and
liabilities are adjusted through the provision for income taxes.
Subsidiaries provide for tax on a separate company basis and remit to the
Company amounts currently due.
STOCK-BASED COMPENSATION
The Company accounts for stock-based awards to employees and directors using the
intrinsic value method, in accordance with APB No. 25, ACCOUNTING FOR STOCK
ISSUED TO EMPLOYEES. Accordingly, no compensation expense has been recognized in
the consolidated financial statements for employee and director stock
arrangements where the grant price is equal to market price. However, the
required pro forma disclosures have been provided in accordance with SFAS No.
123, ACCOUNTING FOR STOCK-BASED COMPENSATION.
FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in estimating the
fair values of financial instruments disclosed in the consolidated financial
statements:
CASH AND SHORT-TERM INSTRUMENTS
The carrying amounts of cash and short-term instruments approximate their fair
value.
SECURITIES AVAILABLE FOR SALE AND HELD TO MATURITY
Fair values for securities, excluding restricted equity securities, are based
on quoted market prices. The carrying values of restricted equity securities
approximate fair values.
(CONTINUED)
F-10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
First Community Financial Group, Inc. and Subsidiaries
December 31, 1998 and 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FAIR VALUES OF FINANCIAL INSTRUMENTS (CONCLUDED)
LOANS
For variable rate loans that reprice frequently and have no significant
change in credit risk, fair values are based on carrying values. Fair
values for fixed rate loans are estimated using discounted cash flow
analyses, using interest rates currently being offered for loans with
similar terms to borrowers of similar credit quality. Fair values of
loans held for sale are based on their estimated market prices. Fair
values for impaired loans are estimated using discounted cash flow
analyses or underlying collateral values, where applicable.
DEPOSIT LIABILITIES
The fair values disclosed for demand deposits are, by definition, equal
to the amount payable on demand at the reporting date (that is, their
carrying amounts). The carrying amounts of variable rate, fixed term
money market accounts and certificates of deposit approximate their
fair values at the reporting date. Fair values for fixed rate
certificates of deposit are estimated using a discounted cash flow
calculation based on interest rates currently being offered on similar
certificates.
SHORT-TERM BORROWINGS
The carrying amounts of short-term borrowings maturing within 90 days
approximate their fair values. Fair values of other short-term
borrowings are estimated using discounted cash flow analyses based on
the Company's current incremental borrowing rates for similar types of
borrowing arrangements.
LONG-TERM DEBT
The fair values of the Company's long-term debt are estimated using
discounted cash flow analyses based on the Company's current
incremental borrowing rates for similar types of borrowing
arrangements. The carrying amounts of variable rate debt approximate
their fair value.
CASH EQUIVALENTS
The Company considers all amounts included in the balance sheets caption "Cash
and due from banks" to be cash equivalents.
EARNINGS PER SHARE
Basic earnings per share exclude dilution and are computed by dividing net
income by the weighted average number of common shares outstanding. Diluted
earnings per share reflect the potential dilution that could occur if common
shares were issued pursuant to the exercise of options under the Company's stock
option plans.
COMPREHENSIVE INCOME
Effective January 1, 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 in a financial statement
that is displayed 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
non-owner 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, comprehensive income includes net income as reported on
the consolidated statements of income, and changes in the fair value of
securities available for sale, reported as a component of stockholders' equity.
There was no effect on previously reported net income as a result of this
reporting change.
(CONTINUED)
F-11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
First Community Financial Group, Inc. and Subsidiaries
December 31, 1998 and 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONCLUDED)
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. This statement
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in its balance sheet and measure those instruments at fair value.
Under this statement, an entity that elects to apply hedge accounting is
required to establish at the inception of the hedge the method it will use for
assessing the effectiveness of the hedging derivative and the measurement
approach for determining the ineffective aspect of the hedge. Those methods must
be consistent with the entity's approach to managing risk. This statement is
effective for all fiscal years beginning after June 15, 1999. The Company had no
derivatives as of December 31, 1998, nor does the Company engage in any hedging
activities. The Company does not anticipate that the adoption of SFAS No. 133
will have a material effect on its financial position or results of operations.
NOTE 2 - ACQUISITIONS
PRAIRIE SECURITY BANK
The Company completed an acquisition of Prairie Security Bank (PSB) effective
February 7, 1997. PSB had three branches and was headquartered in Yelm,
Washington. The Company paid $2,319,000 in cash and issued 307,916 shares of
common stock totaling $7,469,000. The acquisition was treated as a purchase for
accounting purposes. Accordingly, the assets and liabilities of PSB have been
recorded on the books of the Company at their respective fair market values at
the effective date of the acquisition. Goodwill, the excess of the purchase
price (cost) over the net fair value of the assets and liabilities acquired, was
recorded at $5,177,000. Amortization of goodwill over a 25-year period will
result in a charge to earnings of approximately $207,000 per year. Because of
the substantial assets of PSB acquired by the Company, the financial results for
December 31, 1997 are not generally comparable to those of 1996. The combined
organization at December 31, 1997 is significantly larger than it was at
December 31, 1996.
WELLS FARGO BRANCHES
On July 18, 1997, the Bank purchased four Wells Fargo Bank branches in Hoquiam,
Montesano, Toledo and Winlock. The purchase included deposits of approximately
$43 million and the four branch facilities. The assets and liabilities acquired
have been recorded on the books of the Company at their respective fair market
values at the effective date of the acquisition.
Goodwill was recorded for $2,997,000. Amortization of goodwill over a 15-year
period will result in a charge to earnings of approximately $200,000 per year.
F-12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
First Community Financial Group, Inc. and Subsidiaries
December 31, 1998 and 1997
NOTE 3 - RESTRICTED ASSETS
Federal Reserve Board regulations require that the Bank maintain certain minimum
reserve balances on deposit with the Federal Reserve Bank. The amounts of such
balances for the years ended December 31, 1998 and 1997 were approximately
$1,945,000 and $2,895,000, respectively.
NOTE 4 - DEBT AND EQUITY SECURITIES
Debt and equity securities have been classified according to management's
intent. The carrying amount of securities and the approximate fair values at
December 31 were as follows (dollars in thousands):
<TABLE>
<CAPTION>
ESTIMATED GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
SECURITIES AVAILABLE FOR SALE
DECEMBER 31, 1998
U.S. Government and agency securities $15,578 $114 $255 $15,437
Equity securities 2,009 -- -- 2,009
Corporate securities 1,444 14 -- 1,458
Mortgage backed securities 11,144 63 7 11,200
State and municipal securities 5,200 120 6 5,314
$35,375 $311 $268 $35,418
DECEMBER 31, 1997
U.S. Government and agency securities $22,042 $ 98 $26 $22,114
Equity securities 2,709 -- -- 2,709
Corporate securities 4,657 4 2 4,659
Mortgage backed securities 8,649 8 32 8,625
State and municipal securities 3,498 54 1 3,551
$41,555 $164 $61 $41,658
</TABLE>
(CONTINUED)
F-13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
First Community Financial Group, Inc. and Subsidiaries
December 31, 1998 and 1997
NOTE 4 - DEBT AND EQUITY SECURITIES (CONCLUDED)
<TABLE>
<CAPTION>
ESTIMATED GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
SECURITIES HELD TO MATURITY
DECEMBER 31, 1998
State and municipal securities $677 $58 $1 $734
DECEMBER 31, 1997
State and municipal securities $959 $67 $2 $1,024
</TABLE>
The scheduled maturities of debt securities held to maturity and available for
sale at December 31, 1998 were as follows (dollars in thousands):
<TABLE>
<CAPTION>
HELD TO MATURITY AVAILABLE FOR SALE
ESTIMATED ESTIMATED
WEIGHTED WEIGHTED
AMORTIZED FAIR AVERAGE AMORTIZED FAIR AVERAGE
COST VALUE YIELD COST VALUE YIELD
<S> <C> <C> <C> <C> <C> <C>
Due in one year or less $ -- $ -- --% $ 2,140 $ 2,132 5.89%
Due after one year through five years 170 182 5.19 6,421 6,503 6.51
Due after five years through ten years 507 552 5.64 9,986 10,071 5.97
Due after ten years -- -- -- 14,819 14,703 6.40
$677 $734 $33,366 $33,409
</TABLE>
Securities carried at approximately $3,533,000 at December 31, 1998 and
$2,567,000 at December 31, 1997, were pledged to secure public deposits and for
other purposes required or permitted by law.
Gross realized gains and gross realized losses on sales of securities available
for sale were $11 and $5, respectively, in 1998.
F-14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
First Community Financial Group, Inc. and Subsidiaries
December 31, 1998 and 1997
NOTE 5 - LOANS
Loans at December 31 consist of the following (dollars in thousands):
<TABLE>
<CAPTION>
1998 PERCENT OF 1997 PERCENT OF
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
<S> <C> <C> <C> <C>
Commercial $ 29,446 15.15% $ 36,995 18.99%
Real estate construction 17,390 8.95 24,423 12.53
Real estate mortgage:
1-4 Family 24,772 12.74 30,036 15.41
Commercial 116,348 59.86 94,918 48.71
Consumer 6,405 3.30 8,489 4.36
$194,361 100.00% $194,861 100.00%
</TABLE>
Changes in the allowance for credit losses for the years ended December 31 are
as follows (dollars in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Balance at beginning of year $2,122 $1,420 $1,376
Provision charged to operations 425 1,015 261
Transfer from Prairie Security Bank - - 469 - -
Charge-offs (411) (807) (227)
Recoveries 154 25 10
NET CHARGE-OFFS (257) (782) (217)
BALANCE AT END OF YEAR $2,290 $2,122 $1,420
Ratio of net charge-offs to average loans outstanding .13% .44% .17%
</TABLE>
The recorded investment in impaired loans, which were all on nonaccrual status,
was $2,492,000, $4,381,000 and $1,898,000 at December 31, 1998, 1997 and 1996,
respectively. At December 31, 1998, 1997 and 1996, specific allocations of
$227,000, $139,000 and $132,000, respectively, of the allowance for credit
losses were made for $362,000, $992,000 and $1,493,000 of these impaired loans.
No allocation of the allowance for credit losses was considered necessary for
the remaining impaired loans. The average recorded investment in impaired loans
during the years ended December 31, 1998, 1997 and 1996 was $3,544,000,
$3,258,000 and $1,017,000, respectively. Interest income recognized on impaired
loans, which was collected in cash, was insignificant in 1998, 1997 and 1996.
At December 31, 1998, there were no commitments to lend additional funds to
borrowers whose loans were impaired. Loans over 90 days past due still accruing
interest were $471,000 and $319,000 at December 31, 1998 and 1997, respectively.
Certain related parties of the Company, principally Bank directors and their
associates, were loan customers of the Bank in the ordinary course of business
during 1998 and 1997. Total loans outstanding at December 31, 1998 and 1997 to
key officers and directors were $8,553,000 and $7,445,000, respectively. During
1998, advances totaled $3,656,000, and repayments totaled $2,548,000 on these
loans.
F-15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
First Community Financial Group, Inc. and Subsidiaries
December 31, 1998 and 1997
NOTE 6 - PREMISES AND EQUIPMENT
The components of premises and equipment at December 31 are as follows (dollars
in thousands):
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Land $ 1,636 $ 1,950
Buildings 7,933 8,013
Equipment, furniture and fixtures 5,685 6,175
TOTAL COST 15,254 16,138
Less accumulated depreciation and amortization 5,780 5,455
TOTAL PREMISES AND EQUIPMENT $ 9,474 $10,683
</TABLE>
The Bank leases equipment and premises under operating leases. Rental expense of
leased premises and equipment was $260,000, 145,000 and $74,000 for 1998, 1997
and 1996, respectively, which is included in occupancy expense.
Minimum net rental commitments under noncancellable leases having an original or
remaining term of more than one year are as follows at December 31, 1998
(dollars in thousands):
<TABLE>
<S> <C>
1999 $ 167
2000 151
2001 151
2002 151
2003 92
Thereafter 1,037
TOTAL MINIMUM PAYMENTS REQUIRED $ 1,749
</TABLE>
Certain leases contain renewal options of five years and escalation clauses
based on increases in property taxes and other costs.
NOTE 7 - DEPOSITS
The aggregate amount of certificates of deposit with balances in excess of
$100,000 was approximately $14,065,000 and $22,345,000 at December 31, 1998 and
1997, respectively.
At December 31, 1998, the scheduled maturities of certificates of deposit are as
follows (dollars in thousands):
<TABLE>
<CAPTION>
<S> <C>
1999 $70,400
2000 8,171
2001 702
2002 162
2003 and thereafter 70
TOTAL $79,505
</TABLE>
F-16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
First Community Financial Group, Inc. and Subsidiaries
December 31, 1998 and 1997
NOTE 8 - LONG-TERM DEBT
Long-term debt at December 31 is as follows (dollars in thousands):
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Note payable to a director of the Company due in monthly installments
of $8,000, including interest at .75% over the prime rate. Interest
paid in 1998, 1997 and 1996 totaled $6,000, $16,000 and $22,000,
respectively. The note was paid in full in 1998. $ -- $ 122
Note payable on behalf of the Company's KSOP due in monthly principal
installments of $15,000, plus interest at 90% of prime (6.975% at December 31,
1998), collateralized by 27,139 shares of Company stock;
guaranteed by the Company and the Bank. 608 946
Note payable to Key Bank due in annual installments of $550,000, plus monthly
installments of interest at prime rate minus 85 basis points (6.9% at December
31, 1998), collateralized by investment in First Community Bank. 2,200 2,750
$2,808 $3,818
</TABLE>
Principal reductions due on the above indebtedness for the years ending December
31 are as follows: 1999 - $728,000; 2000 - $728,000; 2001 - $728,000; and 2002 -
$624,000.
Under the terms of the business loan agreement with Key Bank, the Company and
the Bank must maintain certain financial ratios. The Company and the Bank were
in compliance with all covenants at December 31, 1998.
NOTE 9 - INCOME TAXES
The Company and its subsidiaries file a consolidated federal income tax return.
Income taxes are comprised of the following for the years ended December 31
(dollars in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Current (refundable) $ 914 ($ 8) $702
Deferred (benefit) 327 (225) 16
TOTAL INCOME TAXES (BENEFIT) $1,241 ($233) $718
</TABLE>
(CONTINUED)
F-17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
First Community Financial Group, Inc. and Subsidiaries
December 31, 1998 and 1997
NOTE 9 - INCOME TAXES (CONCLUDED)
The following is a reconciliation between the statutory and the effective
federal income tax rate for the years ended December 31 (dollars in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
PERCENT PERCENT PERCENT
OF PRETAX OF PRETAX OF PRETAX
AMOUNT INCOME AMOUNT INCOME AMOUNT INCOME
<S> <C> <C> <C> <C> <C> <C>
Income tax based on statutory rate $1,648 34.0% $165 34.0% $877 34.0%
Adjustments resulting from:
Tax-exempt income (95) (2.0) (48) (9.9) (42) (1.6)
Life insurance proceeds -- -- (377) (77.6) -- --
Goodwill amortization 65 1.3 70 14.4 -- --
Tax credits (308) (6.3) -- -- (77) (3.0)
Other (69) (1.4) (43) (8.8) (40) (1.6)
TOTAL INCOME TAXES (BENEFIT) $1,241 25.6% ($233) (47.9%) $718 27.8%
</TABLE>
The tax effects of temporary differences that give rise to significant portions
of deferred tax assets and liabilities at December 31 are (dollars in
thousands):
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
DEFERRED TAX ASSETS
Allowance for credit losses, in excess of tax reserves $ 670 $ 647
Deferred compensation 350 339
Low income housing and alternative minimum tax credits 930 1,029
Valuation reserve (930) (930)
Other deferred tax assets 71 48
TOTAL DEFERRED TAX ASSETS 1,091 1,133
DEFERRED TAX LIABILITIES
Tax depreciation taken in excess of book depreciation 61 126
Deferred income 1,292 987
Unrealized gain on securities available for sale 15 35
Other deferred tax liabilities 89 45
TOTAL DEFERRED TAX LIABILITIES 1,457 1,193
NET DEFERRED TAX LIABILITIES $ 366 $ 60
</TABLE>
F-18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
First Community Financial Group, Inc. and Subsidiaries
December 31, 1998 and 1997
NOTE 10 - LIFE INSURANCE PROCEEDS
In the third quarter of 1997, an officer of the Bank died. As owner and
beneficiary of a life insurance policy on the officer, the Company received
$1,419,000 in insurance proceeds. Other income of $1,110,000 was recorded for
the amount of proceeds received in excess of the cash surrender value of the
policy. The former officer was also a participant in the Executive Supplemental
Income Plan (see Note 14). Death benefits to the officer's beneficiary under
that plan have been accrued by the Company. Expenses recorded in 1997 related to
the survivor benefits were $379,000, and are included in employee benefits
expense on the consolidated statements of income.
NOTE 11 - REPURCHASE OF STOCK AND STOCK OPTIONS
In February 1997, under a Stock Purchase Agreement between the Company and
certain former directors and shareholders, the Company repurchased 122,750
shares of its stock for $2,512,000. In addition, 66,042 stock options were
repurchased for $1,133,000, which was recorded in non-interest expenses.
NOTE 12 - COMMITMENTS AND CONTINGENT LIABILITIES
The Bank is party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing needs of its customers. The
financial instruments include commitments to extend credit and standby letters
of credit. These instruments involve, to varying degrees, elements of credit
risk in excess of the amount recognized on the consolidated balance sheets.
The Bank's exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit and standby
letters of credit is represented by the contractual amount of those instruments.
The Bank uses the same credit policies in making commitments and conditional
obligations as it does for on-balance-sheet instruments. A summary of the Bank's
commitments at December 31 is as follows (dollars in thousands):
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Commitments to extend credit:
Real estate secured $18,444 $13,713
Credit card lines 1,252 4,865
Other 18,715 18,552
TOTAL COMMITMENTS TO EXTENDED CREDIT $38,411 $37,130
Standby letters of credit $1,116 $551
</TABLE>
(CONTINUED)
F-19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
First Community Financial Group, Inc. and Subsidiaries
December 31, 1998 and 1997
NOTE 12 - COMMITMENTS AND CONTINGENT LIABILITIES (CONCLUDED)
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Since many
of the commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements. The
Bank's experience has been that approximately 70% of loan commitments are drawn
upon by customers. The Bank evaluates each customer's creditworthiness on a
case-by-case basis. The amount of collateral obtained, if deemed necessary by
the Bank upon extension of credit, is based on management's credit evaluation of
the party. Collateral held varies, but may include accounts receivable,
inventory, property and equipment, residential real estate, and income-producing
commercial properties.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. Those guarantees are
primarily issued to support public and private borrowing arrangements. The
credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loan facilities to customers. Collateral held varies
as specified above, and is required in instances where the Bank deems necessary.
The Bank has agreements with commercial banks for lines of credit totaling
$3,400,000, none of which were used during 1998 or 1997. The Bank also has a
credit line with the Federal Home Loan Bank, which allows it to borrow up to 10%
of the Bank's assets, $500,000 of which was used at December 31, 1998. Federal
Home Loan Bank borrowings mature in 1999.
CONTINGENCIES
Because of the nature of its activities, the Company is subject to various
pending and threatened legal actions which arise in the ordinary course of
business. In the opinion of management, liabilities arising from these claims,
if any, will not have a material effect on the financial position of the
Company.
The Company has entered into contracts with certain of its executives and
others, which provide for contingent payments subject to future events.
NOTE 13 - SIGNIFICANT CONCENTRATIONS OF CREDIT RISK
The Bank has credit risk exposure, including off-balance-sheet credit risk
exposure, related to real estate loans as disclosed in Notes 5 and 12. The
ultimate collectibility of a substantial portion of the loan portfolio is
susceptible to changes in economic and market conditions in the region. The Bank
generally requires collateral on all real estate exposures and typically
maintains loan-to-value ratios of no greater than 80%.
Investments in state and municipal securities generally involve governmental
entities within Washington State. Standby letters of credit were granted
primarily to commercial borrowers. The Bank, as a matter of practice, generally
does not extend credit to any single borrower or group of related borrowers in
excess of $3,000,000.
The contractual amounts of credit-related financial instruments such as
commitments to extend credit, credit-card arrangements, and letters of credit
represent the amounts of potential accounting loss should the contract be fully
drawn upon, the customer default, and the value of any existing collateral
become worthless.
F-20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
First Community Financial Group, Inc. and Subsidiaries
December 31, 1998 and 1997
NOTE 14 - BENEFIT PLANS
EMPLOYEE STOCK OWNERSHIP PLAN
The Company has a combined employee stock ownership and profit sharing plan with
401(k) provisions (KSOP) which covers substantially all employees who have
completed at least one year of service. The Company accounts for the KSOP in
accordance with Statement of Position 93-6, EMPLOYERS' ACCOUNTING FOR EMPLOYEE
STOCK OWNERSHIP PLANS. Accordingly, the balance of the debt of the KSOP is
included in long-term debt on the accompanying consolidated balance sheets with
a corresponding deduction from stockholders' equity. KSOP shares were pledged as
collateral for the debt. As the debt is repaid, shares are released and
allocated to active employees, based on the proportion of debt paid. As shares
are released from collateral, the Company reports compensation expense equal to
the current market price of the shares. Shares become outstanding for
earnings-per-share computations at the time of allocation to the active
employees.
Eligible employees may defer up to 12% of their annual compensation in a pre-tax
basis subject to certain IRS limits. The Company contributes to the Plan
one-half the employees' contributions up to 3% of the employees' compensation.
Profit sharing contributions to the Plan may also be made at the discretion of
the Board of Directors. The Company also makes contributions equal to the amount
required to service the Plan's debt under the terms of the KSOP note. Company
contributions to this plan totaled $334,000, $320,000 and $191,000 in 1998, 1997
and 1996, respectively.
The KSOP shares as of December 31 were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Allocated shares 143,121 113,830 73,818
Unallocated shares 33,429 48,241 14,700
TOTAL KSOP SHARES 176,550 162,071 88,518
Fair value of unreleased shares $936,012 $1,181,905 $308,000
</TABLE>
Upon termination from the Plan, a participant may choose to have his account
distributed in Company stock, to the extent of his investment in stock, or in
cash. Certain participants may also be eligible to diversify a certain
percentage of their accounts. A distribution of stock in the event of
termination or diversification requires the Company to issue put options to the
participant. This permits the participant to sell the stock to the Company at
fair value at any time during the option periods, which can be as long as 18
months. At December 31, 1998, 1997 and 1996, outstanding put options were not
material.
(CONTINUED)
F-21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
First Community Financial Group, Inc. and Subsidiaries
December 31, 1998 and 1997
NOTE 14 - BENEFIT PLANS (CONCLUDED)
INCENTIVE COMPENSATION PLAN
Incentive compensation is awarded to officers and qualified employees based on
the financial performance of the Company. Awards are payable if the Company and
its subsidiaries meet earnings and other performance objectives and are
determined as a percentage of their base salary. Fees paid to directors are also
adjusted annually based on the financial performance of the Company. Awards
under the plan for 1998, 1997 and 1996 totaled $262,000, $35,000 and $111,000,
respectively.
EXECUTIVE SUPPLEMENTAL INCOME PLAN
The Company provides an Employee Supplemental Income (ESI) plan covering a
select group of management personnel. The post-retirement benefit provided by
the ESI plan is designed to supplement a participating officer's retirement
benefits from social security, in order to provide the officer with a certain
percentage of final average income at retirement age. Expenses related to this
plan totaled $158,000, $348,000 and $54,000 in 1998, 1997 and 1996,
respectively.
Benefits to employees may be funded by life insurance policies purchased by the
Company, which had cash surrender values of $2,818,000, $2,740,000 and
$1,961,000 at December 31, 1998, 1997 and 1996, respectively. Liabilities to
employees, which are being accrued over their expected time to retirement, were
$341,000, $263,000 and $113,000 at December 31, 1998, 1997 and 1996,
respectively.
DIRECTOR DEFERRED INCOME PLAN
In 1992 the Board of Directors approved a plan similar to the ESI plan under
which a director may elect to defer director fees until retirement, and to
provide a death benefit.
Benefits to directors may be funded by life insurance policies purchased by the
Company, which had cash surrender values of $141,000, $419,000 and $127,000 at
December 31, 1998, 1997 and 1996, respectively. Accrued liabilities to directors
at December 31, 1998, 1997 and 1996 totaled $218,000, $183,000 and $122,000,
respectively. Expenses associated with this plan were $35,000, $49,000 and
$58,000 in 1998, 1997 and 1996, respectively.
NOTE 15 - STOCK DIVIDENDS
In 1998 the Board of Directors declared a 5% stock dividend to stockholders of
record as of May 6, 1998. The effect of the dividend was to increase the number
of shares outstanding by 99,187. In 1997 the Board of Directors declared a 5%
stock dividend to stockholders of record as of April 15, 1997. The effect of the
dividend was to increase the number of shares outstanding by 93,678. In 1996 the
Board of Directors declared a 5% stock dividend to stockholders of record on
March 20, 1996. The effect of the dividend was to increase the number of shares
outstanding by 80,226. Accordingly, all references to number of common shares
and per share data in these consolidated financial statements have been restated
to reflect the stock dividends.
F-22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
First Community Financial Group, Inc. and Subsidiaries
December 31, 1998 and 1997
NOTE 16 - STOCK OPTION PLANS
The Company maintains stock option plans for non-employee members of the Board
of Directors and incentive stock option plans for key employees. The exercise
price of the stock options under the plans is usually not less than the fair
market value of the stock at the date of grant. The Company has the first right
of refusal to purchase any shares issued under the Plans prior to being sold on
the open market.
The Company applies APB Opinion No. 25 and related interpretations in accounting
for these plans. Had compensation cost for the Company's stock option plans been
determined based on the fair value at the grant dates for awards granted in
1998, 1997 and 1996 under these plans, consistent with the method prescribed by
SFAS No. 123, the Company's net income and earnings per share would have been
reduced to these pro forma amounts (dollars in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Net income:
As reported $3,605 $719 $1,861
Pro forma 3,159 333 1,501
Earnings per share:
Basic:
As reported $1.74 $.36 $1.01
Pro forma 1.53 .17 .81
Diluted:
As reported 1.62 .34 .93
Pro forma 1.43 .16 .76
</TABLE>
The fair value of each option grant is estimated on the date of grant, based on
the Black-Scholes option-pricing model and using the following weighted average
assumptions: no dividend yield; risk-free interest rate of 4.9% to 6.6%; and
expected lives of 10 years for the options.
The weighted average fair value of options granted during 1998, 1997 and 1996
was $11.48, $7.90 and $9.45, respectively. In the opinion of management, the
assumptions used in the option-pricing model are subjective and represent only
one estimate of possible value, as there is no active market for Company options
granted.
Options granted during 1998, 1997 and 1996 are 20% vested on each of the five
subsequent anniversaries of the grant date. Vesting for 61,933 of these options
is contingent upon "high performance" of the Bank as determined by the Company's
executive committee.
(CONTINUED)
F-23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
First Community Financial Group, Inc. and Subsidiaries
December 31, 1998 and 1997
NOTE 16 - STOCK OPTION PLANS (CONCLUDED)
Stock option and per share amounts for current and prior periods have been
adjusted to reflect the effect of stock dividends, and are as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EMPLOYEE DIRECTOR TOTAL EXERCISE
OPTIONS OPTIONS OPTIONS PRICE
<S> <C> <C> <C> <C>
Under option at December 31, 1996 332,824 81,831 414,655 $12.19
Granted 149,072 5,825 154,897 17.18
Exercised (15,889) (2,913) (18,802) 10.82
Forfeited/repurchased (131,957) -- (131,957) 11.17
UNDER OPTION AT DECEMBER 31, 1997 334,050 84,743 418,793 14.42
Granted 7,000 5,000 12,000 26.67
Exercised (35,680) -- (35,680) 7.77
Forfeited/repurchased (7,574) (2,913) (10,487) 13.91
UNDER OPTION AT DECEMBER 31, 1998 297,796 86,830 384,626 15.43
Options exercisable at December 31, 1998 163,108 76,829 239,937
</TABLE>
Options becoming exercisable under both stock option plans in future years
ending December 31 are as follows: 1999 - 71,763; 2000 - 39,105; 2001 - 21,741;
2002 - 11,480; and 2003 - 600.
Options for 52,246 and 34,975 shares remain available to be granted under the
director and employee plans, respectively, at December 31, 1998.
The following information summarizes information about stock options outstanding
at December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------- ------------------------------------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE
---------- ----------- ------------ -------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Under $10 75,984 3.5 $ 9.25 73,534 $ 9.44
$11 to $14 139,001 5.5 13.78 107,996 13.81
$17 108,241 7 17.28 45,727 17.28
$20 to $23 51,400 9 22.33 10,480 22.29
$30 10,000 10 30.00 2,200 30.00
384,626 239,937
</TABLE>
F-24
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
First Community Financial Group, Inc. and Subsidiaries
December 31, 1998 and 1997
NOTE 17 - CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY
CONDENSED BALANCE SHEETS - DECEMBER 31
(Dollars in Thousands)
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
ASSETS
Cash $ 432 $ 421
Investment in subsidiaries 32,423 28,703
Premises and equipment 2 8
Due from subsidiaries -- 130
Other assets 374 605
TOTAL ASSETS $33,231 $29,867
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Long-term debt $ 2,808 $ 3,696
Other liabilities 82 6
TOTAL LIABILITIES 2,890 3,702
STOCKHOLDERS' EQUITY 30,341 26,165
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $33,231 $29,867
</TABLE>
CONDENSED STATEMENTS OF INCOME - YEARS ENDED DECEMBER 31
(Dollars in Thousands)
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
OPERATING INCOME
Dividends received from subsidiaries $ -- $2,900 $ --
Interest 3 17 22
TOTAL OPERATING INCOME 3 2,917 22
OPERATING EXPENSES
Interest 197 83 100
Other 113 88 --
Repurchase of stock options -- 1,133 --
TOTAL OPERATING EXPENSES 310 1,304 100
INCOME (LOSS) BEFORE INCOME TAXES AND EQUITY
IN UNDISTRIBUTED INCOME OF SUBSIDIARIES (307) 1,613 (78)
INCOME TAXES (BENEFIT) 197 (437) (27)
INCOME (LOSS) BEFORE EQUITY IN UNDISTRIBUTED
INCOME OF SUBSIDIARIES (504) 2,050 (51)
EQUITY IN UNDISTRIBUTED INCOME OF SUBSIDIARIES/
(DIVIDENDS IN EXCESS OF NET INCOME OF SUBSIDIARIES) 4,109 (1,331) 1,912
NET INCOME $3,605 $ 719 $1,861
</TABLE>
(CONTINUED)
F-25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
First Community Financial Group, Inc. and Subsidiaries
December 31, 1998 and 1997
NOTE 17 - CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY (CONCLUDED)
CONDENSED STATEMENTS OF CASH FLOWS - YEARS ENDED DECEMBER 31
(Dollars in Thousands)
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 3,605 $ 719 $ 1,861
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
(Equity in undistributed income of subsidiaries)
dividends in excess of net income of subsidiaries (4,109) 1,331 (1,912)
Decrease in due from subsidiaries 130 2,347 --
Depreciation 6 9 6
Other - net 746 (434) (7)
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 378 3,972 (52)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of Prairie Security Bank -- (2,319) --
Additional investment in First Community Bank -- (2,000) --
NET CASH USED IN INVESTING ACTIVITIES -- (4,319) --
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from exercise of stock options 277 203 45
Payment for fractional shares (14) (13) (11)
Repurchase of common stock (80) (2,512) --
Proceeds from issuance of long-term debt -- 2,750 --
Payments on long-term debt (550) -- --
Other -- (103) --
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (367) 325 34
NET INCREASE (DECREASE) IN CASH 11 (22) (18)
CASH
Beginning of year 421 443 461
END OF YEAR $ 432 $ 421 $ 443
</TABLE>
F-26
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
First Community Financial Group, Inc. and Subsidiaries
December 31, 1998 and 1997
NOTE 18 - REGULATORY MATTERS
The Company and the Bank are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory -- and possibly additional
discretionary -- actions by regulators that, if undertaken, could have a direct
material effect on the Company's financial statements. Under capital adequacy
guidelines on the regulatory framework for prompt corrective action, the Bank
must meet specific capital adequacy guidelines that involve quantitative
measures of the Bank's assets, liabilities, and certain off-balance-sheet items
as calculated under regulatory accounting practices. The Company's and the
Bank's capital classification is also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios (set
forth in the table below) of Tier 1 capital (as defined in the regulations) to
total average assets (as defined), and minimum ratios of Tier 1 and total
capital (as defined) to risk-weighted assets (as defined). Under the regulatory
framework for prompt corrective action, the Bank must maintain minimum Tier 1
leverage, Tier 1 risk-based, and total risk-based ratios as set forth in the
table.
As of December 31, 1998, the most recent notification from the Bank's regulator
categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized, the Bank must
maintain minimum total risk-based, Tier 1 risk-based, Tier 1 leverage ratios as
set forth in the table. There are no conditions or events since that
notification that management believes have changed the institution's category.
The actual capital amounts and ratios are as follows (dollars in thousands):
<TABLE>
<CAPTION>
TO BE WELL CAPITALIZED
CAPITAL ADEQUACY UNDER PROMPT
PURPOSES CORRECTIVE ACTION
ACTUAL PROVISIONS
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
<S> <C> <C> <C> <C> <C> <C>
DECEMBER 31, 1998
TIER 1 CAPITAL (TO AVERAGE ASSETS):
Consolidated $23,428 8.59% $10,913 4.00% N/A N/A
FCB 24,458 8.99 10,884 4.00 $13,605 5.00%
TIER 1 CAPITAL (TO RISK-WEIGHTED ASSETS):
Consolidated 23,428 10.60 8,840 4.00 N/A N/A
FCB 24,458 11.09 8,821 4.00 13,232 6.00
TOTAL CAPITAL (TO RISK-WEIGHTED ASSETS):
Consolidated 25,718 11.64 17,679 8.00 N/A N/A
FCB 26,748 12.13 17,642 8.00 22,053 10.00
</TABLE>
(CONTINUED)
F-27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
First Community Financial Group, Inc. and Subsidiaries
December 31, 1998 and 1997
NOTE 18 - REGULATORY MATTERS (CONCLUDED)
<TABLE>
<CAPTION>
TO BE WELL CAPITALIZED
CAPITAL ADEQUACY UNDER PROMPT
PURPOSES CORRECTIVE ACTION
ACTUAL PROVISIONS
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
<S> <C> <C> <C> <C> <C> <C>
DECEMBER 31, 1997
TIER 1 CAPITAL (TO AVERAGE ASSETS):
Consolidated $19,159 6.58% $11,645 4.00% N/A N/A
FCB 20,491 7.08 11,573 4.00 $14,466 5.00%
TIER 1 CAPITAL (TO RISK-WEIGHTED ASSETS):
Consolidated 19,159 8.30 9,234 4.00 N/A N/A
FCB 20,491 8.91 9,201 4.00 13,802 6.00
TOTAL CAPITAL (TO RISK-WEIGHTED ASSETS):
Consolidated 21,281 9.22 18,468 8.00 N/A N/A
FCB 22,613 9.83 18,402 8.00 23,003 10.00
</TABLE>
Management believes, as of December 31, 1998, that the Company and the Bank meet
all capital requirements to which they are subject.
RESTRICTIONS ON RETAINED EARNINGS
The Bank is subject to certain restrictions on the amount of dividends that it
may declare without prior regulatory approval. At December 31, 1998, all of the
Bank's retained earnings were available for dividend declaration to its parent
company without prior regulatory approval.
NOTE 19 - FAIR VALUES OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments at December 31
were as follows (dollars in thousands):
<TABLE>
<CAPTION>
1998 1997
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
<S> <C> <C> <C> <C>
FINANCIAL ASSETS
Cash and due from banks,
interest bearing deposits with
banks, and federal funds sold $ 15,257 $ 15,257 $ 28,268 $ 28,268
Securities available for sale 35,418 35,418 41,658 41,658
Securities held to maturity 677 734 959 1,024
Loans held for sale 4,456 4,456 4,304 4,304
Loans receivable, net 192,071 191,649 192,739 191,505
FINANCIAL LIABILITIES
Deposits $235,587 $236,093 $263,121 $263,394
Long-term debt 2,808 2,808 3,818 3,818
Short-term borrowings 500 500 -- --
</TABLE>
F-28
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
First Community Financial Group, Inc. and Subsidiaries
December 31, 1998 and 1997
NOTE 20 - OTHER OPERATING INCOME AND EXPENSES
Other operating income and expenses include the following amounts which are in
excess of 1% of the total of interest income and non-interest income for the
years ended December 31 (dollars in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
OTHER OPERATING INCOME
Gain on sale of foreclosed real estate $431 $ 11 $ 41
Commission on sale of non-deposit investment products 594 273 161
OTHER OPERATING EXPENSE
Amortization of goodwill $391 $290 $ --
Office supplies and expense 142 204 208
State taxes 391 338 247
Advertising 162 440 172
Consulting 210 518 107
</TABLE>
NOTE 21 - EARNINGS PER SHARE DISCLOSURES
Following is information regarding the calculation of basic and diluted earnings
per share for the years indicated:
<TABLE>
<CAPTION>
NET INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
<S> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1998
Basic earnings per share:
NET INCOME $3,605,000 2,070,491 $1.74
Effect of dilutive securities:
Options -- 159,769 (.12)
Diluted earnings per share:
NET INCOME $3,605,000 2,230,260 $1.62
YEAR ENDED DECEMBER 31, 1997
Basic earnings per share:
NET INCOME $ 719,000 2,001,527 $ .36
Effect of dilutive securities:
Options -- 134,465 (.02)
Diluted earnings per share:
NET INCOME $ 719,000 2,135,992 $ .34
YEAR ENDED DECEMBER 31, 1996
Basic earnings per share:
NET INCOME $1,861,000 1,849,430 $1.01
Effect of dilutive securities:
Options -- 150,877 (.08)
Diluted earnings per share:
NET INCOME $1,861,000 2,000,307 $ .93
</TABLE>
The number of shares shown for "options" is the number of incremental shares
that would result from exercise of options and use of the proceeds to repurchase
shares at the average market price during the year.
F-29
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
First Community Financial Group, Inc. and Subsidiaries
December 31, 1998 and 1997
NOTE 22 - COMPREHENSIVE INCOME
Net unrealized losses included in other comprehensive income for the year ended
December 31, 1998 include, net of tax, $36,000 of unrealized losses arising
during 1998, plus reclassification adjustments of $4,000 for gains included in
net income for 1998 as follows:
<TABLE>
<CAPTION>
BEFORE-TAX TAX NET-OF-TAX
AMOUNT EXPENSE AMOUNT
<S> <C> <C> <C>
Unrealized holding losses arising during the year $54 $18 $36
Plus reclassification adjustments for gains realized
in net income 6 2 4
NET UNREALIZED LOSSES $60 $20 $40
</TABLE>
NOTE 23 - YEAR 2000 ISSUES
As the year 2000 approaches, business issues are emerging regarding how existing
computer software programs and operating systems can accommodate the date value.
Many software systems are designed to recognize only a two-digit date field, and
may read the year 2000 as the year 1900. Thus computations of interest and other
similar calculations may be based on wrong dates, or the systems may not be able
to process information at all.
The Bank has implemented a year 2000 compliance program, which is aggressively
reviewing year 2000 issues that may be faced by its outside vendors and
customers, and that affect its internal computer systems. In the event that
significant suppliers or customers do not successfully and timely achieve year
2000 compliance, the Bank's business could be adversely affected. However,
management believes that the Bank's own internal systems, networks and resources
would allow the Bank to effectively operate and service its customers. To the
extent necessary, the Bank will engage alternative vendors and suppliers to
facilitate normal operations after January 1, 2000. The costs incurred to date
on year 2000 compliance issues have not been material. While it is impossible to
estimate the potential impact on the Bank's business after January 1, 2000,
management estimates that the costs the Bank will incur prior to that date in
its activities necessary to ensure year 2000 compliance will not have a
significant effect on its financial position or results of operations.
F-30
<PAGE>
APPENDIX A
FIRST COMMUNITY FINANCIAL GROUP, INC.
EMPLOYEE STOCK OPTION PLAN
1. PURPOSE OF THE PLAN. The purpose of this Employee Stock Option Plan
("Plan") is to provide additional incentives to key employees of FIRST
COMMUNITY FINANCIAL GROUP, INC., a Washington corporation ("First
Community") and any of its existing or future Subsidiaries, thereby
helping to attract and retain the best available personnel for positions
of responsibility with said corporations and otherwise promoting the
success of the business activities of First Community. First Community
intends that Options issued pursuant to this Plan shall constitute either
Incentive Stock Options within the meaning of Section 422 of the Code or
Nonqualified Stock Options
2. DEFINITIONS. As used in this Plan, the following definitions apply:
a. "First Community" has the meaning set forth in paragraph 1 of this
Plan.
b. "Board" means the Board of Directors of First Community.
c. "Code" means the Internal Revenue Code of 1986, as amended.
d. "Common Stock" means First Community's common stock, currently with
a par value of $2.50 per share.
e. "Committee" has the meaning set forth in subparagraph 4(a) of this
Plan.
f. "Continuous Status as Employee" means the absence of any
interruption or termination of service as an Employee. Continuous
Status as an Employee shall not be considered interrupted in the
case of sick leave, military leave or any other approved leave of
absence.
g. "Date of Grant" of an Option means the date on which the Committee
makes the determination granting such Option, or such later date as
the Committee may designate. The Date of Grant shall be specified in
the Option agreement.
h. "Employee" means any person employed by First Community, or a
Subsidiary of First Community which is currently in existence or is
hereafter organized or is acquired by First Community.
i. "Exercise Price" has the meaning set forth in subparagraph 4(b)(2)
of this Plan.
j. "Option" means a stock option granted under this Plan. Options shall
include both Incentive Stock Options as defined under Section 422 of
the Code and Nonqualified Stock Options, which refer to all stock
options other than Incentive Stock Options.
<PAGE>
k. "Optionee" means an Employee who receives an Option.
l. "Plan" has the meaning set forth in paragraph 1 of this Plan.
m. "Parent" means any corporation owning at least eighty percent (80%)
of the total voting power of the issued and outstanding stock of
First Community, and eighty percent (80%) of the total value of the
issued and outstanding stock of First Community.
n. "Shareholder-Employee" means an Employee who owns stock representing
more than ten percent (10%) of the total combined voting power of
all classes of stock of First Community or of any Subsidiary or
parent company. For this purpose, the attribution of stock ownership
rules provided in Section 424(d) of the Code shall apply.
o. "Subsidiary" means any corporation of which not less than fifty
percent (50%) of the voting shares are held by First Community or a
Subsidiary, whether or not such corporation now exists or is
hereafter organized or acquired by First Community or a Subsidiary.
3. STOCK SUBJECT TO OPTIONS.
a. NUMBER OF SHARES RESERVED. The maximum number of shares which may be
optioned and sold under this Plan is 40,000 shares of the Common
Stock of First Community (subject to adjustment as provided in
subparagraph 6(j) of this Plan). During the term of this Plan, First
Community will at all times reserve and keep available a sufficient
number of shares of its Common Stock to satisfy the requirements of
this Plan.
b. EXPIRED OPTIONS. If any outstanding Option expires or becomes
unexercisable for any reason without having been exercised in full,
the shares of Common Stock allocable to the unexercised portion of
such Option will again become available for other Options.
4. ADMINISTRATION OF THE PLAN.
a. THE COMMITTEE. The Board will administer this Plan directly, acting
as a Committee of the whole, or if the Board elects, by a separate
Committee appointed by the Board for that purpose and consisting of
at least three Board members. All references in the Plan to the
"Committee" refers to this separate Committee, if any is
established, or if none is then in existence, refers to the Board as
a whole. Once appointed, any Committee will continue to serve until
otherwise directed by the Board. From time to time, the Board may
increase the size of the Committee and appoint additional members,
remove members (with or without cause), appoint new members in
substitution, and fill vacancies however caused. The Committee will
select one of its members as chairman, and will hold
2
<PAGE>
meetings at such times and places as the chairman or a majority of
the Committee may determine. At all times, the Board will have the
power to remove all members of the Committee and thereafter to
directly administer this Plan as a Committee of the whole.
(1) Members of the Committee who are eligible for Options or who
have been granted Options will be counted for all purposes in
determining the existence of a quorum at any meeting of the
Committee and will be eligible to vote on all matters before
the Committee respecting the granting of Options or
administration of this Plan.
(2) At least annually, the Committee must present a written report
to the Board indicating the persons to whom Options have been
granted since the date of the last such report, and in each
case the Date of Grant, the number of shares optioned, and the
per-share Exercise Price.
b. POWERS OF THE COMMITTEE. All actions of the Committee must be either
(i) by a majority vote of the members of the full Committee at a
meeting of the Committee, or (ii) by unanimous written consent of
all members of the full Committee without a meeting. All decisions,
determinations and interpretations of the Committee will be final
and binding on all persons, including all Optionees and any other
holders or persons interested in any Options, unless otherwise
expressly determined by a vote of the majority of the entire Board.
No member of the Committee or of the Board will be liable for any
action or determination made in good faith with respect to the Plan
or any Option. Subject to all provisions and limitations of the
Plan, the Committee will have the authority and discretion:
(1) to determine the persons to whom Options are to be granted,
the Dates of Grant, and the number of shares to be represented
by each Option;
(2) to determine the price at which shares of Common Stock are to
be issued under an Option, subject to subparagraph 6(b) of
this Plan ("Exercise Price");
(3) to determine all other terms and conditions of each Option
granted under this Plan (including specification of the dates
upon which Options become exercisable, and whether conditioned
on performance standards, periods of service or otherwise),
which terms and conditions can vary between Options;
(4) to modify or amend the terms of any Option previously granted,
or to grant substitute Options, subject to subparagraphs 6(l)
and 6(m) of this Plan;
3
<PAGE>
(5) to authorize any person or persons to execute and deliver
Option agreements or to take any other actions deemed by the
Committee to be necessary or appropriate to effect the grant
of Options by the Committee;
(6) to interpret this Plan and to make all other determinations
and take all other actions which the Committee deems necessary
or appropriate to administer this Plan in accordance with its
terms and conditions.
5. ELIGIBILITY. Options may be granted only to Employees. Granting of Options
under this Plan will be entirely discretionary with the Committee.
Adoption of this Plan will not confer on any Employee any right to receive
any Option or Options under this Plan unless and until said Options are
granted by the Committee in its sole discretion. Neither the adoption of
this Plan nor the granting of any Options under this Plan will confer upon
any Employee or Optionee any right with respect to continuation of
employment, nor will the same interfere in any way with his or her right
or with the right of the shareholders of First Community or any Subsidiary
to terminate his or her employment at any time.
6. TERMS AND CONDITIONS OF OPTIONS. All Options granted under this Plan must
be authorized by the Committee, and must be documented in written Option
agreements in such form as the Committee will approve from time to time,
which agreements must comply with and be subject to all of the following
terms and conditions:
a. NUMBER OF SHARES; ANNUAL LIMITATION. Each Option agreement must
state whether the Option is intended to be an Incentive Stock Option
or a Nonqualified Stock Option and the number of shares subject to
Option. Any number of Options may be granted to an Employee at any
time; except that, in the case of Incentive Stock Options, the
aggregate fair market value (determined as of each Date of Grant) of
all shares of Common Stock with respect to which Incentive Stock
Options become exercisable for the first time by such Employee
during any one calendar year (under all incentive stock option plans
of the Company and all of its Subsidiaries taken together) shall not
exceed $100,000. Any portion of an Option in excess of the $100,000
limitation shall be treated as a Nonqualified Stock Option
b. EXERCISE PRICE AND CONSIDERATION. The Exercise Price shall be the
price determined by the Committee, subject to subparagraphs (1) and
(2) below.
(1) In the case of Incentive Stock Options, the Exercise Price
shall in no event be less than the fair market value of the
Common Stock on the Date of Grant. In the case of an Incentive
Stock Option granted to a Employee who, immediately before the
grant of such Incentive Stock Option, is a
Shareholder-Employee, the Exercise Price shall be at least
110% of the fair market value of the Common Stock on the Date
of Grant.
4
<PAGE>
(2) In all cases, the Exercise Price shall be no less than the
greater of (i) the fair market value of the Common Stock or
(ii) the net book value of the Common Stock at the time of
grant, as is determined by the Committee.
(3) In all cases, the Exercise Price shall be payable either in
(i) United States dollars upon exercise of the Option, (ii)
Common Stock of First Community, or (iii) if approved by the
Board, other consideration including without limitation
services, debt instruments or other property.
c. TERM OF OPTION. No Option shall in any event be exercisable after
the expiration of ten (10) years from the Date of Grant. Further, no
Incentive Stock Option granted to a Employee who, immediately before
such Incentive Stock Option is granted, is a Shareholder-Employee
shall be exercisable after the expiration of five (5) years from the
Date of Grant. Subject to the foregoing and other applicable
provisions of the Plan including but not limited to subparagraphs
6(g), 6(h) and 6(i), the term of each Option will be determined by
the Committee in its discretion.
d. NON-TRANSFERABILITY OF OPTIONS. No Option may be sold, pledged,
assigned, hypothecated, transferred, or disposed of in any manner
other than by will or by the laws of descent or distribution and may
be exercised, during the lifetime of the Optionee, only by the
Optionee.
e. MANNER OF EXERCISE. An Option will be deemed to be exercised when
written notice of exercise has been given to First Community in
accordance with the terms of the Option by the person entitled to
exercise the Option, together with full payment for the shares of
Common Stock subject to said notice.
f. RIGHTS AS SHAREHOLDER. An Optionee shall have none of the rights of
a shareholder with respect to any shares covered by his or her
Option unless and until the Optionee has exercised such Option and
submitted full payment for the shares.
g. DEATH OF OPTIONEE. An Option shall be exercisable at any time prior
to termination under subparagraphs (1) or (2), below, by the
Optionee's estate or by such person or persons who have acquired the
right to exercise the Option by bequest or by inheritance or by
reason of the death of the Optionee. In the event of the death of an
Holder,
(1) an Incentive Stock Option shall terminate no later than the
earliest of (i) one year after the date of death of the
Optionee if the Optionee had been in Continuous Status as an
Employee since the Date of Grant of the Option, or (ii) the
date specified under subparagraph 6(i) of this Plan if the
Optionee's status as an Employee was terminated prior to his
or her death, or (iii) the expiration date otherwise provided
in the applicable Option agreement; and
5
<PAGE>
(2) a Nonqualified Stock Option shall terminate no later
than the earlier of (i) one year after the date of death
of the Optionee, or (ii) the expiration date otherwise
provided in the Option agreement, except that if the
expiration date of a Nonqualified Stock Option should
occur during the 180-day period immediately following
the Optionee's death, such Option shall terminate at the
end of such 180-day period.
h. DISABILITY OF OPTIONEE. If an Optionee's status as an Employee is
terminated at any time during the Option period by reason of a
disability (within the meaning of Section 22(e)(3) of the Code) and
if said Optionee had been in Continuous Status as an Employee at all
times between the date of grant of the Option and the termination of
his or her status as an Employee, his or her Option shall terminate
no later than the earlier of (i) one year after the date of
termination of his or her status as an Employee, or (ii) the
expiration date otherwise provided in his or her Option agreement.
i. TERMINATION OF STATUS AS AN EMPLOYEE.
(1) If an Optionee's status as an Employee is terminated at any
time after the grant of an Option to such Employee for any
reason other than death or disability (as described in
subparagraphs 6(g) and 6(h) above) and not for cause, as
provided in subparagraph (2) below, then such Option shall
terminate no later than the earlier of (i) the same day of the
third month after the date of termination of his or her status
as an Employee, or (ii) the expiration date otherwise provided
in his or her Option agreement.
(2) If an Optionee's status as an Employee is terminated for cause at
any time after the grant of an Option to such Employee, then such
Option shall terminate at the end of the day on the date of
termination of his or her status as an Employee. For this purpose,
"cause" includes fraud or willful misconduct or any other conduct
which the Board reasonably believes will cause or has caused First
Community substantial injury as a result of gross negligence or
dishonesty.
j. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION. Subject to any required
action by the shareholders of First Community, the number of shares
of Common Stock covered by each outstanding Option, the number of
shares of Common Stock available for grant of additional Options,
and the per-share Exercise Price in each outstanding Option, will be
proportionately adjusted for any increase or decrease in the number
of issued shares of Common Stock resulting from any stock split or
other subdivision or consolidation of shares, the payment of any
stock dividend (but only on the Common Stock) or any other increase
or decrease in the number of such shares of Common Stock effected
without receipt of consideration by First Community; PROVIDED,
however, that conversion of any convertible securities of First
Community will not be deemed to have been "effected without
6
<PAGE>
receipt of consideration." Such adjustment will be made by the
Committee, whose determination in that respect will be final,
binding and conclusive.
(1) Except as otherwise expressly provided in this subparagraph 6(j), no
Optionee will have any rights by reason of any stock split or the
payment of any stock dividend or any other increase or decrease in
the number of shares of Common Stock, and no issuance by First
Community of shares of stock of any class, or securities convertible
into shares of stock of any class, will affect the number of shares
or Exercise Price subject to any Options, and no adjustments in
Options will be made by reason thereof. The grant of an Option under
this Plan will not affect in any way the right or power of First
Community to make adjustments, reclassifications, reorganizations or
changes of its capital or business structure.
k. CONDITIONS UPON ISSUANCE OF SHARES. Shares of Common Stock will not
be issued with respect to an Option granted under this Plan unless
the exercise of such Option and the issuance and delivery of such
shares pursuant thereto will comply with all applicable provisions
of law, including applicable federal and state securities laws. As a
condition to the exercise of an Option, First Community may require
the person exercising such Option to represent and warrant at the
time of exercise that the shares of Common Stock are being purchased
only for investment and without any present intention to sell or
distribute such Common Stock if, in the opinion of counsel for First
Community, such a representation is required by any of the
aforementioned relevant provisions of law.
l. CORPORATE SALE TRANSACTIONS. In the event of the merger or
reorganization of First Community with or into any other
corporation, the sale of substantially all of the assets of First
Community, or a dissolution or liquidation of First Community
(collectively, "Sale Transaction"), (1) all outstanding Options that
are not then fully exercisable will become exercisable upon the date
of closing of any sale transaction or such earlier date as the
Committee may fix; and (2) the Committee may, in the exercise of its
sole discretion, terminate all outstanding Options as of a date
fixed by the Committee. In such event, however, the Committee must
notify each Optionee of such action in writing not less than sixty
(60) days prior to the termination date fixed by the Committee, and
each Optionee must have the right to exercise his or her Option
prior to said termination date.
m. SUBSTITUTE STOCK OPTIONS. In connection with an internal
reorganization of First Community, the Committee is authorized, in
its discretion, to substitute for any unexercised Option, a new
option for shares of the resulting entity's stock.
n. TAX COMPLIANCE. First Community, in its sole discretion, may take
actions reasonably believed by it to be required to comply with any
local, state, or federal tax laws relating to the reporting or
withholding of taxes attributable to the grant or exercise of any
Option or the disposition of any shares of Common Stock
7
<PAGE>
issued upon exercise of an Option, including, but not limited to
(i) withholding from any Optionee exercising an Option a number
of shares of Common Stock having a fair market value equal to the
amount required to be withheld by First Community under
applicable tax laws, and (ii) withholding from any form of
compensation or other amount due an Optionee, or holder, of
shares of Common Stock issued upon exercise of an Option any
amount required to be withheld by First Community under
applicable tax laws. Withholding or reporting will be considered
required for purposes of this subparagraph if the Committee, in
its sole discretion, so determines.
o. HOLDING PERIOD FOR INCENTIVE STOCK OPTIONS. With regard to shares of
Common Stock issued pursuant to an Incentive Stock Option granted
under the Plan, if the Optionee (or such other person who may
exercise the Option pursuant to subparagraph 6(g) of this Plan)
makes a disposition of such shares within two years from the Date of
Grant of such Option, or within one year from the date of issuance
of such shares to the Optionee upon the exercise of such Option,
then the Optionee must request and obtain approval from the Company
in writing of such disposition and must cooperate with the Company
in any tax compliance relating to such disposition.
p. OTHER PROVISIONS. Option agreements executed under this Plan may
contain such other provisions as the Committee will deem advisable.
7. TERM OF THE PLAN. This Plan will become effective and Options may be
granted upon the Plan's approval by the Board, subject to shareholder
approval. Unless sooner terminated as provided in subparagraph 7(a) of
this Plan, this Plan will terminate on the tenth (10th) anniversary of its
effective date. Options may be granted at any time after the effective
date and prior to the date of termination of this Plan.
a. AMENDMENT OR EARLY TERMINATION OF THE PLAN. The Board may terminate
this Plan at any time. The Board may amend this Plan at any time and
from time to time in such respects as the Board may deem advisable,
except that, without approval of the shareholders, no revision or
amendment will increase the number of shares of Common Stock subject
to this Plan other than in connection with an adjustment under
subparagraph 6(j) of this Plan.
b. EFFECT OF AMENDMENT OR TERMINATION. No amendment or termination of
this Plan will affect Options granted prior to such amendment or
termination, and all such Options will remain in full force and
effect notwithstanding such amendment or termination.
8. SHAREHOLDER APPROVAL. Adoption of this Plan will be subject to
ratification by affirmative vote of shareholders owning at least a
majority of the outstanding Common Stock of First Community at a duly
convened meeting. If such shareholder approval is not obtained within
twelve (12) months after the date of the Board's adoption of this Plan,
then this Plan shall terminate subject to subparagraph 7(b) of the Plan
except that
8
<PAGE>
any Incentive Stock Options previously granted under the Plan shall
become Nonqualified Stock Options, and no further Options shall be
granted under the Plan.
* * * * *
9
<PAGE>
- -------------------------------------------------------------------------------
[LOGO] PROXY MAY 4, 1999
1999 ANNUAL MEETING
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
THE UNDERSIGNED HEREBY AUTHORIZES THE VOTE, AS DESIGNATED BELOW, OF ALL THE
SHARES OF COMMON STOCK OF FIRST COMMUNITY FINANCIAL GROUP, INC. HELD ON RECORD
BY THE UNDERSIGNED ON MARCH 24, 1999 AT THE ANNUAL MEETING OF SHAREHOLDERS TO
BE HELD AT 6:00 PM ON MAY 4, 1999 OR ANY ADJOURNMENT OF SUCH MEETING.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE ELECTION OF EACH OF THE
FOLLOWING DIRECTORS, AND FOR THE APPROVAL OF THE EMPLOYEE STOCK OPTION PLAN:
PLEASE CHECK ONE BOX FOR EACH:
A. E. PAUL DETRAY / / FOR / / AGAINST / / ABSTAIN
B. MICHAEL N. MURPHY / / FOR / / AGAINST / / ABSTAIN
C. 1999 EMPLOYEE STOCK OPTION PLAN / / FOR / / AGAINST / / ABSTAIN
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED HEREIN
BY THE UNDERSIGNED SHAREHOLDER. UNLESS OTHERWISE SPECIFIED, THE SHARES WILL BE
VOTED FOR AS RECOMMENDED BY THE BOARD OF DIRECTORS.
_________________________________________________
SIGNATURE OF SHAREHOLDER(S)
_________________________________________________
SIGNATURE OF SHAREHOLDER(S)
NOTE: SIGNATURES SHOULD AGREE WITH NAME INDICATED TO THE RIGHT.
______I PLAN TO ATTEND THE MEETING IN OLYMPIA, WASHINGTON, AT 6:00 PM ON
MAY 4, 1999.
PLEASE DATE, SIGN AND RETURN THIS PROXY. EVEN IF YOU PLAN TO ATTEND THE
MEETING, PLEASE RETURN THIS PROXY. THANK YOU.
- -------------------------------------------------------------------------------
