<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>
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 9, 2000, 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 2003, or until their successors have been
elected and qualified.
2. WHATEVER OTHER BUSINESS may properly be brought before the meeting or
any adjournment of the meeting.
Only those shareholders of record at the close of business on March 24, 2000,
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 7, 2000 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.
================================================================================
1
<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 7, 2000, 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
9, 2000. Only those shareholders of record at the close of business on March 24,
2000 ("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 2,177,567.
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 OF PROXIES. If the enclosed Proxy is duly executed and received in time
for the meeting, it is the intention of the persons named in the Proxy to vote
the shares represented by the Proxy FOR the two nominees listed in this Proxy
Statement, unless otherwise directed. Any proxy given by a shareholder may be
revoked before its exercise by written notice to FCFG, by a subsequently dated
proxy, or in open meeting prior to the taking of the shareholder vote. The
shares represented by properly executed, unrevoked proxies will be voted in
accordance with the specifications in the Proxy. Shareholders have one vote for
each share of Common Stock held, including the election of directors.
Shareholders are not entitled to cumulate their votes in the election of
directors.
ELECTION OF DIRECTORS
GENERAL
FCFG's Bylaws provide that the number of directors must fall within a range of 5
and 15, the exact number to be determined by resolution of the Board of
Directors. The present size of the board has been fixed at 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.
2
<PAGE>
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. Martin or Parsons for election as directors
for three-year terms to expire in the year 2003. The Board of Directors has no
present knowledge that any of the nominees will refuse or be unable to serve. If
either of Messrs. Martin and Parsons 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 director
nominees and the other continuing directors, including the number of shares
beneficially held by each as of January 1, 2000. Beneficial ownership is a
technical term broadly defined by the SEC to mean more than ownership in the
usual sense. In general, beneficial ownership includes any shares a director or
executive officer can vote or transfer and stock options that are exercisable
currently or become exercisable within 60 days. Except as noted below, each
holder has sole voting and investment power for all shares shown as beneficially
owned. Where beneficial ownership was less than one percent of all outstanding
shares, the percentage is not reflected in the table.
NOMINEES FOR DIRECTOR FOR THREE YEAR TERM EXPIRING IN 2003 (CLASS III DIRECTORS)
<TABLE>
<CAPTION>
SHARES & PERCENTAGE OF COMMON
NAME, AGE AND PRINCIPAL OCCUPATION OF DIRECTOR STOCK BENEFICIALLY OWNED
TENURE AS DIRECTOR DURING LAST FIVE YEARS AS OF JANUARY 1, 2000
- ------------------ -------------------------------- -----------------------------
<S> <C> <C>
Patrick L. Martin, 61 President, Patrick's Decorating 89,067 (2) 4.09%
Director since 1980 Center (1)
Ken F. Parsons, 54 Chairman, President & CEO, 226,823 (3) 10.42%
Director since 1978 FCFG and FCB
</TABLE>
- --------------------------------------------------------------------------------
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT
YOU VOTE "FOR" ALL OF THE DIRECTOR NOMINEES
- --------------------------------------------------------------------------------
- --------------------
(1) 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.
(2) Includes 18,908 shares held jointly with spouse; 4,442 shares held in an
IRA account for the benefit of Mr. Martin; 1,244 shares held in an IRA
account for the benefit of Mr. Martin's wife; 44,564 unallocated shares
held by the KSOP, considered beneficially owned by Mr. Martin as trustee
for the KSOP; and 7,957 shares which could be acquired within 60 days by
the exercise of stock options.
(3) Includes 86,439 shares held jointly with spouse; 1,866 shares held in an
IRA account for the benefit of Mr. Parsons; 1,238 shares held in an IRA
account for the benefit of Mr. Parson's wife; 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; and 108,038 shares which could be acquired within 60 days by the
exercise of stock options.
3
<PAGE>
DIRECTORS WITH TERM EXPIRING IN 2001 (CLASS I DIRECTORS)
<TABLE>
<CAPTION>
SHARES & PERCENTAGE OF COMMON
NAME, AGE AND PRINCIPAL OCCUPATION OF DIRECTOR STOCK BENEFICIALLY OWNED
TENURE AS DIRECTOR DURING LAST FIVE YEARS AS OF JANUARY 1, 2000
- ------------------ -------------------------------- -----------------------------
<S> <C> <C>
A. Richard Panowicz, 55 President, Archives Northwest 96,905 (4) 4.45%
Director since 1995
Kenneth M. Wilcox, 70 Retired Pharmacist 49,189 (5) 2.26%
Director since 1979
</TABLE>
DIRECTORS WITH TERM EXPIRING 2002 (CLASS II DIRECTORS)
<TABLE>
<CAPTION>
SHARES & PERCENTAGE OF COMMON
NAME, AGE AND PRINCIPAL OCCUPATION OF DIRECTOR STOCK BENEFICIALLY OWNED
TENURE AS DIRECTOR DURING LAST FIVE YEARS AS OF JANUARY 1, 2000
- ------------------ -------------------------------- -----------------------------
<S> <C> <C>
E. Paul DeTray, 66 President, DeTray's Quality Homes 101,044 (6) 4.64%
Director since 1979
Michael N. Murphy, 57 Washington State Deputy Auditor 18,977 (7)
Director since 1978
</TABLE>
- ----------------
(4) 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; 44,564 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.
(5) Includes 46,232 shares held jointly with spouse; and 2,957 shares held in
an IRA account for the benefit of Mr. Wilcox.
(6) Includes 62,237 shares held jointly with spouse; 18,753 shares held by
DeTray's Quality Homes; and 12,850 held by the DeTray Family Partnership.
(7) Includes 5,834 shares which could be acquired within 60 days by the
exercise of stock options.
4
<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 four (4) meetings of the Board of
Directors of FCFG during 1999. 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, Compensation Committee and an
Audit Committee. There is presently no standing Nominating Committee.
EXECUTIVE COMMITTEE. The FCFG Executive Committee is authorized, to the extent
permitted by law, to act on behalf of the Board of Directors on all matters that
may arise between regular meetings of the Board upon which the Board of
Directors would be authorized to act. Current members of the Executive committee
are Messrs. DeTray, Martin, Panowicz, and Parsons (Chairman). The Executive
Committee did not meet during 1999.
COMPENSATION COMMITTEE. The Compensation Committee's purpose includes reviewing
and proposing to the Board of Directors the compensation to be paid to Mr.
Parsons and other compensation and benefit matters for the Bank. There were four
(4) meetings of the Compensation Committee held in 1999. Current members of the
committee are Messrs. Martin (Chairman), DeTray, Panowicz, Bridges and Rants.
Mr. Bridges and Mr. Rants are members of the board of directors of the bank.
AUDIT COMMITTEE. The Audit Committee's function is to meet with management, the
internal auditors and the independent auditors to review and evaluate the
Company's audited financial statements, internal accounting controls, regulatory
examinations and compliance with laws, regulations and corporate policy. Current
members of the committee are Messrs. Panowicz (Chairman), DeTray, Murphy, and
Linda Buckner and Jewell Manspeaker. Ms. Buckner and Mr. Manspeaker are members
of the board of directors of the Bank. There were four (4) meetings of the Audit
Committee during 1999.
DIRECTOR COMPENSATION
DIRECTOR AND COMMITTEE FEES. FCFG has an established program for director
compensation in which each director of FCFG receives a monthly retainer fee of
$350. Directors of the Bank also receive a monthly retainer of $350, a board
meeting attendance fee of $400 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 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.
No fees were paid for 1999 performance. Directors were each paid a $1,000
performance based fee in February 1999 for 1998 performance.
5
<PAGE>
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 not be less than the greater of
the book value or market value at the time of grant, and options have a term of
not more than ten years from the date of grant. At December 31, 1999, options to
purchase 59,670 shares remained granted and unexercised under the 1994 Plan and
1989/1992 Plans, and 52,245 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 the Chief Executive
Officer, and those executive officers earning in excess of $100,000 during the
last fiscal year.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Long Term Compensation
---------------------------------------------------------------------------------------
Annual Compensation Awards Payouts
---------------------------------------------------------------------------------------
Securities
Restricted Underlying
Name and Other Annual Stock Options/ LTIP All Other
Principal Position Year Salary($) Bonus($) Compensation($) Awards($) SARs(#)(1) Payouts($) Compensation($)(2)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
KEN F. PARSONS 1999 $183,090 $ 0 $0 0 0 0 $25,227
President, Director & 1998 $171,200 $70,438 $0 0 0 0 $21,575
CEO-FCFG Chairman, 1997 $155,200 $18,000 $0 0 0 0 $17,000
Director & CEO-Bank
- -----------------------------------------------------------------------------------------------------------------------------------
JAMES F. ARNESON
EVP/CFO, Secretary 1999 $98,333 $ 0 $0 0 5,000 0 $ 7,418
and Treasurer of 1998 $88,250 $36,628 $0 0 0 0 $ 5,627
FCFG and FCB 1997 $81,000 $ 6,000 $0 0 21,000 0 $ 5,152
- -----------------------------------------------------------------------------------------------------------------------------------
JON M. JONES
EVP and Chief 1999 $83,336 $ 0 $0 0 5,000 0 $ 6,038
Lending Officer of 1998 $76,286 $28,175 $0 0 0 0 $ 4,019
FCB 1997 $70,484 $ 0 $0 0 10,500 0 $ 3,234
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Consists of awards granted pursuant to FCFG's Employee Stock Option and
Restricted Stock Award Plan.
(2) Includes any fees paid to Mr. Parsons as a director for participation in
Board and committee meetings of $13,350, $11,975 and $8,000 for 1999, 1998
and 1997, respectively, and amounts paid by FCFG pursuant to the Company's
Employee Stock Ownership Plan with 401(k) Provisions. Amount does not
include deferred director fees totaling $4,800 for 1998, and $8,100 for
1997 for Mr. Parsons.
6
<PAGE>
STOCK OPTIONS
STOCK OPTION GRANTS. The following table sets forth certain information
concerning individual grants of stock options under the stock option plans to
the named executive officers during the year ended December 31, 1999.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
INDIVIDUAL GRANTS POTENTIAL REALIZABLE VALUE AT
ASSUMED ANNUAL RATES OF STOCK
PRICE APPRECIATION FOR OPTION
TERM (1)
- -----------------------------------------------------------------------------------------------------------------
% OF TOTAL
OPTIONS OPTIONS GRANTED EXERCISE
NAME GRANTED (2) TO EMPLOYEES PRICE EXPIRATION DATE 5% 10%
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
James F. Arneson 5,000 19.2% $30.00 3/24/2009 $45,450 $161,249
- -----------------------------------------------------------------------------------------------------------------
Jon M. Jones 5,000 19.2% $30.00 3/24/2009 $45,450 $161,249
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The potential realizable value is based on the assumption that the stock
price appreciates at the annual rate shown (compounded annually) from the
date of grant until the end of the ten-year option term. These numbers are
calculated based on the requirements of the SEC and do not reflect FCFG's
estimate of future stock price performance. Actual gains, if any, on stock
options exercised and common stock holding are dependent upon future
performance of the Company and overall stock market conditions. There can
be no assurance that the amounts reflected in this table will be achieved.
(2) Each option granted vests at the rate of approximately 20% per annum,
beginning March 24, 1999. Options will become immediately exercisable in
the event of a change in control of the Company. Each option has an
exercise price equal to the greater of (i) the fair market value; or (ii)
the net book value of the Common Stock on the date of grant. The options
were granted on March 24, 1999.
STOCK OPTION EXERCISES. The following table sets forth certain information
concerning exercises of stock options pursuant to FCFG's stock option plans by
the executive officers named in the compensation table during the year ended
December 31, 1999 and stock options held at year end.
7
<PAGE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND YEAR END OPTION VALUES
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Shares Number of Value of
Acquired on Value Realized Unexercised Unexercised
Name Exercise (1) Options at Year End Options at Year End (2)
-------------------------------------------------------------------------------
Exercisable Unexercisable Exercisable Unexercisable
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Ken F. Parsons 13,711 $194,496 108,038 35,886 $163,981 0
- --------------------------------------------------------------------------------------------------------------------
James F. Arneson 23,417 17,600 $130,008 0
- --------------------------------------------------------------------------------------------------------------------
Jon M. Jones 1,500 $30,454 8,716 11,300 $59,940 0
- --------------------------------------------------------------------------------------------------------------------
</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, 1999, the estimated market price of the Common Stock was
$24.00. 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 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 thirty-six 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, with automatic two-year term renewals on each anniversary date of the
agreement. FCFG may terminate the agreement at any time for cause without
incurring any post-termination obligation to Mr. Arneson, or without 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.
8
<PAGE>
EMPLOYEE COMPENSATION PLANS
EXECUTIVE SUPPLEMENTAL INCOME PLAN
In 1992, the Company adopted an Executive Supplemental Income Plan ("ESIP")
covering a senior group of management personnel. The post-retirement benefit
provided by the ESIP is designed to supplement a participating officer's
retirement benefits from social security, in order to provide the officer with a
certain percentage of final average income at retirement age. Additionally, the
ESIP provides a pre-retirement death benefit. These benefits are funded by life
insurance policies owned by the Company covering the lives of participants.
EMPLOYEE STOCK OPTION AND RESTRICTED STOCK AWARD PLAN
In 1999, Shareholders of FCFG approved the 1999 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
subsidiaries, (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,
1999, options covering 297,932 shares were granted and remain unexercised under
this plan and all predecessor plans, and 40,000 shares remain available for
future grant.
Under the terms of the Plan, the exercise price of option shares will be the
greater of the fair market value or net book value of the shares on the date the
option is granted. All options granted in accordance with the Plan are incentive
options under Section 422A of the Internal Revenue Code, and are exercisable
over a ten (10) year period from the date of the grant.
EMPLOYEE STOCK OWNERSHIP PLAN
FCFG provides retirement benefits to eligible employees through an Employee
Stock Ownership Plan that includes Internal Revenue Code 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 on a pre-tax basis subject to
certain IRS limits. Under the terms of the Plan, the Company matches 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, Martin, and Panowicz. Investment of
employee contributions to the KSOP are directed by the employee into a
combination of 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, 1999 were $300,000.
9
<PAGE>
INCENTIVE COMPENSATION PLAN
Incentive compensation is awarded to officers and qualified employees based on
the financial performance of the Company. Awards are payable if the Company
meets earnings and growth objectives and are determined as a percentage of the
participant's base salary.
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. Current members of the Committee are Messrs.
Martin (Chairman), DeTray, and Panowicz, and Sonny Bridges and Ron Rants (who
serve on the board of directors of the Bank). 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.
10
<PAGE>
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 established by the
Chief Executive Officer, taking into account such factors as competitive
industry salaries, an executive's scope of responsibilities, and individual
performance and contribution to the organization.
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 1999, 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 does not participate in matters relating to his
own compensation.
11
<PAGE>
CONCLUSION
The Committee believes that for the 1999 fiscal year, the compensation for Mr.
Parsons, as well as for the other executive officers, was consistent with FCFG's
overall compensation philosophy and clearly related to the realization of FCFG's
goals and strategies for the year.
Respectfully submitted by Committee members:
E. PAUL DETRAY * PATRICK L. MARTIN (CHAIRMAN) *
RICHARD PANOWICZ * SONNY BRIDGES * RON RANTS
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, 1994,
in the Bank's Common Stock and each of the indices.
[GRAPH]
<TABLE>
<CAPTION>
PERIOD ENDING
------------------------------------------------------------------------------------
Index 12/31/94 12/31/95 12/31/96 12/31/97 12/31/98 12/31/99
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
FCFG $100.00 $113.82 $131.46 $153.72 $184.47 $161.47
S&P 500 $100.00 $137.12 $168.22 $223.90 $287.35 $347.36
NASDAQ - BANKS $100.00 $147.36 $190.05 $315.37 $283.33 $267.12
</TABLE>
12
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table provides information as of January 1, 2000, with respect to
the shares beneficially owned by (i) the non-director executive officers named
in the compensation table; (ii) all persons known by management who beneficially
own more than five percent of FCFG's common stock and (iii) all executive
officers and directors of FCFG as a group. Except as noted below, each holder
has sole voting and investment power with respect to shares listed as owned.
Unless otherwise noted, all shares owned represent less than one percent of the
outstanding shares of FCFG.
<TABLE>
<CAPTION>
Name, Relationship Current Position with Company and Number of Shares Percent of Class
with FCFG Prior Five Year Business Experience Beneficially Owned Beneficially Owned
- ------------------- ----------------------------------- ------------------ ------------------
<S> <C> <C> <C>
James F. Arneson, 39 EVP, Chief Financial Officer 72,782 (1) 3.34%
Jon M. Jones, 38 EVP/Chief Lending Officer since 1998 14,926 (2) --
SVP/Chief Lending Officer - 1997
VP/Regional Business Banking Manager
1995 - 1996
FCFG Employee Stock
Ownership Plan ("KSOP") 308,484 (3) 14.17%
Directors and Executive
Officers as a group (7) 571,869 (4) 26.27%
</TABLE>
- -----------------
(1) Includes 2,000 shares held held jointly with spouse; 180 shares held in an
IRA account for the benefit of Mr. Arneson; 2,621 shares held in the KSOP
for the benefit of Mr. Arneson; 44,564 unallocated shares held by the KSOP
which are considered beneficially owned by Mr. Arneson as trustee for the
KSOP; and 23,417 shares which could be acquired within 60 days by the
exercise of stock options.
(2) Includes 1,775 shares held jointly with spouse; 4,435 shares held in the
KSOP for the benefit of Mr. Jones and 8,716 shares which could be acquired
within 60 days by the exercise of stock options.
(3) In addition to the 44,564 unallocated shares held by the KSOP, includes
28,218, 44,503, and 52,341 beneficially owned by Messrs. Arneson, Martin
and Panowicz, respectively, solely as trustees of the KSOP, over which the
KSOP disclaims beneficial ownership.
(4) Includes 44,564 unallocated shares held by the KSOP which are considered
beneficially owned by Messrs. Arneson, Martin and Panowicz. Also includes
options for 156,951 shares owned by directors and management, which are
exercisable within 60 days of December 31, 1999.
13
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During 1999 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.
FCB leases office space in which the Hawks Prairie branch office is located at
130 Marvin Road SE, Lacey, Washington, from Hawks Prairie Professional Center
LLC, of which the Company's President and Chief Executive Officer, Ken F.
Parsons is a partner. The initial term of the lease is five (5) years, with
three five (5) year renewal options. The current lease payment is $10,355 per
month, (which is adjusted on an annual basis in accordance with the Consumer
price Index for the Seattle, Tacoma, Bremerton area effective on each
anniversary date of the lease). The Company and FCB considers the rent and the
terms and conditions of the lease agreement to be fair and substantially the
same or better than the terms and conditions of leases prevailing for comparable
arms-length transactions.
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.
AUDITORS
The firm of Knight Vale & Gregory PLLC performed the audit of the consolidated
financial statements for FCFG and its wholly owned subsidiaries, for the year
ended December 31, 1999.
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 1999 results and financial position with that of 1998 and
1997.
14
<PAGE>
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 and allowance for credit losses, 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 1999, the company's total assets grew 8%,or $22,207,000 to $293,773,000.
Deposits increased $9,940,000, or 4% to $245,527,000. The balance of the asset
growth resulted from an increase in federal funds purchased and other short term
borrowings, which provided an additional $13,035,000. Strong loan demand fueled
the asset growth. During 1999 loans, including loans held for sale, increased to
$235,776,000 from $198,817,000, an increase of $36,959,000, or 19%.
Basic earnings per share for 1999 was $0.64 per share as compared to $1.74 per
share for 1998 and $0.36 per share for 1997. The 1999 earnings and rates of
return were significantly impacted by a special provision related to a
particular borrower, which is discussed further under "ALLOWANCE FOR CREDIT
LOSSES". The 1997 results were affected by significant charges related to the
Company's acquisitions and costs associated with the repurchase of stock
options.
The following table sets forth certain operating and capital ratios for the
Company at December 31:
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Return on Average Assets 0.48% 1.26% .29% 1.08% 0.53%
Return on Average Equity 4.26% 12.61% 2.76% 9.30% 4.71%
Average Equity to Average Assets Ratio 11.32% 9.96% 10.40% 11.58% 11.28%
</TABLE>
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
management believes are nonrecurring or that are not related to what 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.
15
<PAGE>
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 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 Statements of Income. 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) 1999 1998 1997
<S> <C> <C> <C>
Net interest income $ 15,078 $ 14,727 $ 13,121
Non-interest income 4,619 4,919 3,193
Non-interest expenses (14,109) (13,948) (13,116)
-------- -------- --------
Operating income 5,588 5,698 3,198
Provision for credit losses (3,730) (425) (1,015)
Non-core items
Merger and integration costs -- (391) (968)
Asset write-down -- (36) (140)
Repurchase of stock options -- -- (1,133)
Life insurance income -- -- 1,110
Officer survivor benefits -- -- (379)
Other -- -- (187)
-------- -------- --------
-- (427) (1,697)
Income before income taxes 1,858 4,846 486
-------- -------- --------
(Provision) Benefit for income taxes (498) (1,241) 233
-------- -------- --------
Net income $ 1,360 $ 3,605 $ 719
======== ======== ========
</TABLE>
Operating income for 1999 decreased $110,000, or 2% from 1998. Highlights for
the period are discussed below.
RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income in 1999 increased by $351,000, or 2%, from 1998. During the
year interest income decreased $842,000, or 4% while interest expense decreased
$1,193,000, or 14%. During the year the net interest margin increased 20 basis
points from 5.86% to 6.06%.
Total interest income decreased from 1998 by $842,000 to $22,570,000. Total
interest income on loans increased by $707,000. Of this amount, $1,735,000
resulted from an increase in the average volume of loans during the year. This
was partially offset by $1,028,000 resulting from a decrease in the average
yield on the loans portfolio from 10.21% in 1998 to 9.59% in 1999. Offsetting
the increase in total loan interest, was a decline in the interest earned on
investment securities and overnight investments, which decreased $1,,549,000. Of
this amount, $244,000 came from a decline in the average yield on investment
securities and overnight investments, while $1,305,000 was the result of a
decrease in the average volume of these instruments, which were used to fund
loan growth.
16
<PAGE>
Total interest expense decreased 14% or $1,193,000 in 1999 to $7,492,000. Of
this decrease $641,000 resulted from a decline in the average volume of interest
bearing deposits, and $707,000 was from a decline in the average cost of funds
during the year. The average volume of interest bearing deposits decreased
$13,152,000 or 6%, while the average cost of interest bearing deposits decreased
42 basis points or 10% to 3.61%.
An analysis of the change in net interest income is as follows (THOUSANDS):
<TABLE>
<CAPTION>
1999 compared to 1998 1998 compared to 1997
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 $ 1,735 $(1,028) $ 707 $ 1,473 $ (483) $ 990
Federal funds sold and deposits
in banks (358) (62) (420) (333) 29 (304)
Investment securities (947) (182) (1,129) 1,490 76 1,566
Total interest income 429 (1,271) (842) 2,630 (378) 2,252
Interest paid on:
Savings, NOW and MMA (55) (234) (289) 588 (80) 507
Time deposits (586) (473) (1,059) 101 (102) (1)
Other borrowings 166 (11) 155 161 (22) 140
Total Interest expense (475) (718) (1,193) 850 (204) 646
Net interest income $ 904 $ (553) $ 351 $ 1,780 $ (174) $ 1,606
</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.
17
<PAGE>
Average consolidated statements of financial position and analysis of net
interest spread were as follows (dollars in thousands):
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
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) $213,997 $20,518 9.59% $194,016 $19,811 10.21% $179,396 $18,821 10.49%
Federal funds sold and interest
bearing deposits in banks 2,307 112 4.85% 9,529 532 5.58% 15,484 836 5.40%
Investment securities 32,318 1,940 6.00% 47,930 3,069 6.40% 24,606 1,503 6.11%
Total earning assets and
interest income 248,622 22,570 9.08% 251,475 23,412 9.31% 219,486 21,160 9.64%
-------- ------- -------- ------- -------- -------
Other Assets:
Cash and due from banks 13,208 12,178 10,907
Bank premises and equipment 9,583 10,312 10,173
Other assets 13,513 15,329 11,725
Allowance for credit losses (2,471) (2,276) (1,954)
Total Assets $282,455 $287,018 $250,337
======== ======== ========
- -----------------------------------------------------------------------------------------------------------------------------------
Liabilities and
Stockholders' Equity
Interest bearing liabilities:
Deposits:
Savings, NOW, and
Money Market Deposits $110,746 $(2,802) 2.53% $112,779 (3,091) 2.74% $ 91,220 (2,584) 2.83%
Time deposits 84,154 (4,240) 5.04% 95,273 (5,299) 5.56% 93,457 (5,300) 5.67%
-------- ------- -------- ------- -------- -------
Total interest bearing deposits 194,900 (7,042) 3.61% 208,052 (8,390) 4.03% 184,677 (7,884) 4.27%
Other borrowings 6,788 (450) 6.63% 4,269 (295) 6.91% 1,863 (155) 8.32%
-------- ------- -------- ------- -------- -------
Total interest bearing liabilities
and interest expense 201,688 (7,492) 3.71% 212,321 (8,685) 4.09% 186,540 (8,039) 4.31%
-------- ------- -------- ------- -------- -------
Non-interest bearing deposits 46,541 44,468 35,685
Other liabilities 2,264 1,640 2,076
Stockholder equity 31,962 28,589 26,036
-------- --------
Total liabilities,
stockholders' equity
and net interest income $282,455 $15,078 $287,018 $14,727 $250,337 $13,121
======== ======= ======== ======= ======== =======
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income as an
average of earnings assets:
Interest Income 9.08% 9.31% 9.64%
Interest Expense 3.01 3.45 3.66
---- ---- ----
Net Interest Income 6.06% 5.86% 5.98%
---- ---- ----
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) For purposes of these computations, non-accrual loans are included in the
average loan balance outstanding. Loan fees and late charges of $1,859,000,
$1,902,000 and $1,991,000 are included in interest income in 1999, 1998 and
1997, respectively.
18
<PAGE>
NON-INTEREST INCOME
Total non-interest income decreased from 1998 by $264,000 to $4,619,000. Net
service charges and fees on deposit accounts increased 1% to $1,949,000.
Mortgage loan origination fees declined 8% or $111,000 due to a rising interest
rate environment which slowed mortgage origination activity during the year.
Other non-interest income decreased by $171,000 from 1998 to $1,510,000. In 1998
the Bank sold its credit card portfolio and certain of its foreclosed real
estate, realizing aggregate gains of $431,000, $408,000 more than earned in
1999. Fees from the Bank's ATM network increased by $103,000 from 1998 to
$187,000 as a result of both deployment of additional ATMs and the
implementation of a convenience fee levied on the use of the Bank's machines by
non-customers. Earnings from the Bank's debit card program increased 48% during
the year to $98,000
NON-INTEREST EXPENSE
Total non-interest expense decreased by $230,000 to $14,109,000 in 1999.
Salaries and benefits increased only $81,000, or 1% to $7,945,000. Occupancy
expenses increased by 3% as additional locations were opened for operational and
administrative needs. Equipment expenses decreased by 3% from the prior year,
and other expenses declined 7%, compared with 1998. The decline in other
expenses primarily resulted from a decrease in the costs associated with the
management of problem loans and foreclosed real estate. The ratio of
non-interest expense as a percent of average total assets for the year decreased
to 4.99% from 5.00% in 1998.
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) 1999 1998 1997
<S> <C> <C> <C>
NON-INTEREST EXPENSES
Salaries and benefits $ 7,945 $ 7,864 $ 7,551
Occupancy 1,003 978 707
Equipment 1,200 1,239 1,305
Other 3,961 3,867 3,553
------- ------- -------
14,109 13,948 13,116
NON-CORE EXPENSE ITEMS
Merger and integration costs -- 391 968
Officer survivor benefits -- -- 379
Repurchase of stock options -- -- 1,133
Other -- -- 187
------- ------- -------
-- 391 2,667
Total Non-interest Expenses $14,109 $14,339 $15,783
</TABLE>
NON-CORE NON-INTEREST EXPENSE ITEMS. In connection with the 1997 acquisition of
Prairie Security Bank and the four Wells Fargo Bank branches, merger and
integration costs of $968,000 were incurred that year. 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.
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.
19
<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 increased by 8% to $293,773,000 in 1999. Asset growth
was greatest in the loan portfolio. The loan portfolio, excluding loans held for
sale and the allowance for credit losses, increased $38,464,000, or 20% compared
to 1998. Cash flows from the securities portfolio and a decrease in overnight
investments were used to partially fund the loan growth. Total deposits and
short term borrowings at December 31, 1999 increased from 1998 by $9,942,000 and
$13,035,000, respectively.
INVESTMENTS
The Company's investment portfolio decreased $6,631,000 to $29,116,000. Maturing
securities and other cash flows from the portfolio were used to fund loan
growth. 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 $28,439,000. 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
Amortized Unrealized Realized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
Available-for-Sale Securities
December 31, 1999
Equity Securities $ 1,774 $ -- $ -- $ 1,774
U.S. Government and agency securities 7,731 -- 530 7,201
Corporate Securities 5,339 -- 137 5,202
Mortgage backed securities 7,154 10 137 7,027
State and municipal securities 7,544 6 315 7,235
$29,542 $ 16 $1,119 $28,439
December 31, 1998
Equity securities $ 1,661 $ -- $ -- $ 1,661
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
$35,027 $311 $ 268 $35,070
(CONTINUED)
20
<PAGE>
<CAPTION>
Gross Gross
Amortized Unrealized Realized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
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
Held-to-Maturity Securities
December 31, 1999
State and municipal securities $ 677 $ 25 $ 1 $ 701
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 stated maturities of debt securities were as follows (dollars in thousands):
<TABLE>
<CAPTION>
Held-to-Maturity Securities Available-for-Sale Securities
--------------------------- -----------------------------
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 $ -- $ -- --% $ 564 $ 564 6.11%
Due after one year through five years 275 280 5.59% 11,126 10,850 5.95%
Due after five years through ten years 402 421 6.12% 6,764 6,465 5.41%
Due after 10 years -- -- --% 9,314 8,786 6.47%
$677 $701 $27,768 $26,665
</TABLE>
Mortgage backed securities are allocated based on their anticipated principal
repayment.
There were no gross realized gains or gross realized losses on sales of
securities available for sale in 1999 and 1997.
Gross realized gains and losses on sales of securities available for sale were
$11,000 and $5,000, respectively in 1998.
21
<PAGE>
LOANS
Loan balances of portfolio loans increased by $38,464,000 to $232,825,000 in
1999.
The composition of the loan portfolio was as follows at December 31 (dollars
in thousands):
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial $ 34,981 15.0% $ 29,446 15.2% $ 36,995 19.0% $ 27,353 20.9% $ 28,259 22.4%
Real estate construction 19,169 8.2% 17,390 8.9% 24,423 12.5% 14,071 10.8% 15,701 12.5%
Real estate mortgage 170,203 73.1% 141,120 72.6% 124,954 64.1% 83,242 63.7% 75,128 59.5%
Consumer 8,472 3.7% 6,405 3.3% 8,489 4.4% 5,966 4.6% 7,066 5.6%
$232,825 100.0% $194,361 100.0% $194,861 100.0% $130,632 100.0% $126,154 100.0%
</TABLE>
The Bank's loan portfolio is concentrated in real estate secured loans. Real
estate mortgage loans primarily consist of commercial loans secured by real
estate.
The following table shows the maturity analysis of commercial and real estate
construction loans outstanding as of December 31, 1999 (dollars in thousands):
<TABLE>
<CAPTION>
After One
Within But Within After
One Year Five Years Five Years Total
<S> <C> <C> <C> <C>
Commercial $20,285 $11,104 $ 3,592 $34,981
Real estate construction 12,183 6,421 565 19,169
$32,468 $17,525 $ 4,157 $54,150
</TABLE>
Of these loans maturing after one year, $11,308,000 have predetermined or fixed
interest rates and $10,374,000 have floating or adjustable interest rates.
DEPOSITS
Total deposits increased by $9,940,000, or 4% from 1998 to $245,527,000.
Non-interest bearing deposits decreased by 9% to $42,481,000 in 1999 from
$46,538,000 in 1998. Savings and interest bearing deposits and time deposits
increased by $13,997,000, or 7%, to $203,046,000.
The Bank's deposits at December 31 are summarized as follows (dollars in
thousands):
<TABLE>
<CAPTION>
1999 1998 1997
Weighted Weighted Weighted
Average Average Average
Amount % Rate Amount % Rate Amount % Rate
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Demand Deposits $ 42,481 17.3 $ 46,538 19.8 $ 43,245 16.4
Interest bearing demand 80,755 32.9 2.69% 84,427 35.8 2.86% 85,740 32.6 2.78%
Savings Accounts 24,764 10.1 2.28% 25,117 10.7 2.37% 26,743 10.2 2.92%
Other time deposits 97,527 39.7 5.04% 79,505 33.7 5.56% 107,393 40.8 5.67%
TOTAL $245,527 100.0 $235,587 100.0 $263,121 100.0
</TABLE>
22
<PAGE>
Time deposits at December 31, 1999 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 $17,525 $15,544 $33,069
91-180 days 16,723 3,103 19,826
181-365 days 28,550 7,206 35,756
Over 1 year 6,956 1,920 8,876
$69,754 $27,773 $97,527
</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 continued to decrease, declining 31% to
$3,418,000 at December 31, 1999 from $4,959,000 at year-end 1998. Non-accrual
loans decreased by $1,016,000, or 41% to $1,476,000. Accruing loans past due 90
days or more decreased 94% from $471,000 to $28,000. Foreclosed real estate
decreased by $106,000. Any anticipated losses on these loans have been fully
reserved for in the allowance for credit losses.
Nonperforming assets were as follows at December 31 (dollars in thousands):
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Non-accrual loans $1,476 $2,492 $4,381 $1,898 $1,427
Accruing loans past due 90 days or more 28 471 319 1,238 401
Foreclosed real estate 1,890 1,996 2,105 1,063 385
Other assets 24 -- 132 -- --
$3,418 $4,959 $6,937 $4,199 $2,213
</TABLE>
The gross interest income that would have been recorded in 1999 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,
totaled $144,000. No interest income on these loans was included in net income
in 1999.
The Company is not aware of any loans continuing to accrue interest at December
31, 1999 that represent or result from trends or uncertainties which management
reasonably expects will materially impact future operating results, liquidity,
or capital resources. 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 have been fully reserved in the
allowance for credit losses.
23
<PAGE>
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.
Transactions in the allowance for credit losses for the five years ended
December 31, 1999 are as follows (dollars in thousands):
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Balance at beginning of year $2,290 $2,122 $1,420 $1,376 $1,250
Provision for credit losses 3,730 425 1,015 261 236
Transfer from Prairie Security Bank -- -- 469 0 --
Charge offs:
Commercial (116) (219) (627) (34) (138)
Real Estate Mortgage (65) (98) (69) (116) (12)
Consumer (66) (94) (111) (77) (26)
------ ------ ------ ------ ------
(247) (411) (807) (227) (176)
------ ------ ------ ------ ------
Recoveries 52 154 25 10 66
Net charge-offs (195) (257) (782) (217) (110)
Balance at end of year $5,825 $2,290 $2,122 $1,420 $1,376
Ratio of net charge-offs to
average loans outstanding .09% .13% .44% .17% .09%
</TABLE>
The provision for credit losses increased from $425,000 in 1998 to $3,730,000 in
1999. Of this increase, $3,250,000 was the result of a special provision that
was precipitated by a deterioration in the financial condition of one of the
Bank's large public commercial loan customers. Late in the fourth quarter this
customer reported a severe downturn in its financial condition. Although the
customer has continued to meet its obligations to the Bank, its ability to do so
in the future is in doubt. Accordingly, to reflect the potential loss on the
loans, the Bank has made a special addition of $3,250,000 to its allowance for
credit losses. Additionally, the Bank has obtained collateral from the guarantor
of the loan. In the event of default, the Bank will take steps to realize upon
the collateral. Should the customer continue to meet its obligations, the Bank
may in the future reverse all or a portion of this special provision.
24
<PAGE>
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 the lower of cost or fair value, and
certain large groups of smaller balance homogeneous loans that are collectively
measured for impairment. The following table summarizes the Bank's impaired
loans at December 31:
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Total Impaired Loans $4,726,000 $2,492,000 $4,381,000 $1,898,000 $1,427,000
Total Impaired Loans with
Valuation Allowance $3,680,000 $362,000 $992,000 $1,493,000 $814,000
Allocation of Allowance for Credit
Losses $3,347,000 $227,000 $139,000 $132,000 $164,000
</TABLE>
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 allocates
its allowance for credit losses primarily on the basis of historical data. Based
on certain characteristics of the portfolio, losses can be anticipated for major
loan categories.
In the following table, the allowance for credit losses at December 31, 1999,
1998, 1997, 1996 and 1995 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>
1999 1998 1997 1996 1995
% of % of % of % of % of
Total Total Total Total Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial $3,616 62.1% $576 15.2% $678 19.0% $412 29.0% $295 21.4%
Real Estate 2,112 36.2% 1,633 81.5% 1,200 76.6% 887 62.5% 953 69.3%
Consumer 97 1.7% 81 3.3% 244 4.4% 121 8.5% 128 9.3%
Total $5,825 100.0% $2,290 100.0% $2,122 100.0% $1,420 100.0% $1,376 100.0%
</TABLE>
25
<PAGE>
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 withdrawing 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 include 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 available for sale, particularly those of shorter
maturity, and are the principal source of asset liquidity. At December 31,
1999, cash, deposits in banks, Federal funds sold and securities available
for sale totaled $38,924,000. 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, 1999, overnight and federal funds lines of
credit totaled $35,377,000. These credit lines were accessed frequently as a
source of funding during 1999 and amounted to $13,535,000 at December 31,1999.
Management believes the Bank's liquidity position at December 31, 1999, was
adequate to meet its short term funding requirements.
Interest rate sensitivity is closely related to liquidity, as each is
directly affected by the maturity of assets and liabilities. The Company's
net interest margin is affected by changes in the level of market interest
rates. Management's objectives are to monitor and control interest rate risk
and ensure predictable and consistent growth in net interest income.
Management considers any asset or liability which matures, or is subject to
repricing within one year to be interest sensitive, although continual
monitoring is performed for other time intervals as well. The difference
between interest sensitive assets and liabilities for a defined period of
time is known as the interest sensitivity "gap", and may be either positive
or negative. If positive, more assets reprice before liabilities. If
negative, the reverse is true. Gap analysis provides a general measure of
interest rate risk but does not address complexities such as prepayment risk,
interest rate floors and ceilings imposed on financial instruments, interest
rate dynamics and customers' response to interest rate changes. Currently the
Banks' interest sensitivity gap is negative within one year. Assuming that
general market interest rate changes affect the repricing of assets and
liabilities in equal magnitudes, the effect 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.
26
<PAGE>
INTEREST RATE GAP ANALYSIS DECEMBER 31, 1999
<TABLE>
<CAPTION>
Within After One But After Five Total
(DOLLARS IN THOUSANDS) One Year Within Five Years
Years
<S> <C> <C> <C> <C>
Loans $ 83,277 $119,148 $30,400 $232,825
Securities:
Available for sale 565 10,620 15,480 26,665
Held to maturity -- 170 507 677
Interest bearing deposits with banks 136 -- -- 136
Federal funds sold 0 -- -- 0
Total Earning Assets $ 83,978 $129,938 $46,387 $260,303
Deposits:
Savings, NOW and money market $ 105,519 -- -- $105,519
Time deposits 88,652 $ 8,875 -- 97,527
Short-term borrowings 13,535 -- -- 13,535
Long-term debt 2,030 -- -- 2,030
Total Interest Bearing Liabilities $ 209,736 $ 8,875 -- $218,611
Net Interest Rate Sensitivity Gap $(125,759) $121,063 $46,387 $41,691
</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.
According to this model and its assumptions, 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 $158,000. This amount represents
approximately 1.1% of the 1999 net interest income.
CAPITAL
Consolidated capital of FCFG increased $277,000 during 1999. In addition to
net earnings of $1,360,000, the exercise of stock options added $530,000, tax
benefits associated with the exercise of stock options provided $177,000 and
payments by the KSOP on the debt related to the Company's KSOP amounted to
$228,000. The primary decrease to capital came from the payment of cash
dividends of $0.58 per share, or $1,262,000. No cash dividends were paid in
1998, 1997, 1996 or 1995. Reported capital was also decreased by $756,000 as
a result of the decrease in market value of the securities available for sale
portfolio. This decrease was due to the increase in market rates in 1999 and
represents the net unrealized decrease in the fair value of securities
available for sale from their market values of the previous year.
27
<PAGE>
There are regulatory constraints placed upon capital adequacy, however 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, 1999, the Company's leverage ratio was
8.47%, compared to 8.59% at year-end 1998. For regulatory purposes, any
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 credit losses, subject to 1.25% limitation of risk-adjusted
assets. The rules require Tier II capital of 4% of risk-adjusted assets and
total capital (combined Tier I and Tier II) of 8%. At December 31, 1999, the
Tier I capital ratio was 8.94%, and total capital was 10.21%. The similar
ratios at December 31, 1998 were a Tier I capital ratio of 10.60% and a total
capital ratio of 11.64%.
SUPPLEMENTARY DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DEC SEPT JUNE MARCH DEC SEPT JUNE MARCH
1999 1999 1999 1999 1998 1998 1998 1998
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income $ 5,897 $5,804 $5,569 $5,300 $5,769 $5,870 $5,886 $5,887
Interest expense 2,029 1,906 1,808 1,749 1,935 2,129 2,257 2,364
Net interest income 3,868 3,898 3,761 3,551 3,834 3,741 3,629 3,523
Provision for credit losses 3,370 120 120 120 100 65 130 130
Non-interest income 1,197 1,187 1,165 1,070 1,324 1,247 1,222 1,090
Non-interest expense 3,359 3,575 3,673 3,502 3,563 3,655 3,674 3,447
Income taxes (benefit) (625) 434 364 325 294 332 295 320
Net income (loss) $(1,039) 956 $ 769 $ 674 $1,201 $ 936 $ 752 $ 716
Basic earnings per share (.48) .44 .36 .32 .58 .44 .37 .35
</TABLE>
FUTURE OUTLOOK
The following statements are forward-looking and should be read in
conjunction with information contained in the section entitled
"Forward-looking Information".
The Company's objective is to continue growing in current and contiguous
market areas in order to achieve greater economies of scale, and to have
sufficient physical presence in these markets to effectively serve its
customers. The Company has employed a strategy of growth by a combination of
acquisitions and de novo branching, and will likely continue this strategy in
the future. Management believes its growth prospects are very good,
particularly in Pierce County, and intends to actively pursue expansion
opportunities.
28
<PAGE>
Due to the rise in interest rates and increased competition for deposits in
the Bank's local market area as well as nationally, the cost of funding, both
in the form of deposits and borrowings is expected to rise. Although a
portion of the Bank's loan portfolio will also reprice to keep pace with
rising market interest rates, a portion will not. Additionally, to fund
continued loan growth it may be necessary to raise deposit interest rates in
a magnitude greater than the increase in loan rates. During 1999 the Bank's
net interest margin increased 20 basis points to 6.06%, however, the above
factors may put pressure on the margin in the future.
YEAR 2000 COMMENTS
The Year 2000 or Y2K problem is a result of the inability of computer
software programs to recognize the year 2000, as 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. As the Company has reported in
the past, it has spent considerable effort in preparing for Y2K in the period
leading up to January 1, 2000.
The Company has not experienced any significant Y2K problems and has not been
informed of any material Y2K problems by its customers or vendors. However,
although January 1, 2000 is past, it is possible that some problems have gone
undetected, or that other dates in the future may further affect computer
software and systems, or equipment with embedded chip technology.
The Company will continue to monitor the Y2K compliance of its own computer
systems and equipment with embedded technology, as well as any Y2K related
problems that may be reported to it by third parties with whom it does
business.
As discussed in the Company's Form 10-Q for the fiscal quarter ended
September 30, 1999, the Company estimated that the total costs of remediation
associated with the Y2K issue would not have a material effect on the
operations or financial condition of the Company. The Company believes, based
on its review of such costs to March 15, 2000, that this statement continues
to be true. However, as noted above, it is possible that additional costs
will be incurred in connection with Y2K problems that may still occur in the
future.
FORWARD LOOKING STATEMENTS
The discussion above regarding the Company's Y2K status includes certain
"forward looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995 (the "PLSRA"). The Company desires to take
advantage of the "safe harbor" provisions of the PLSRA as they apply to
forward looking statements. The Company's ability to predict the results 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 the possibility that systems
modifications will not operate as intended, and that the Company or its
significant customers or vendors have not yet detected Y2K problems that have
arisen or will arise in the future.
29
<PAGE>
SHAREHOLDER PROPOSALS FOR THE 2001 ANNUAL MEETING
Shareholders interested in presenting a proposal for consideration at the annual
meeting of shareholders in 2001 may do so by following the procedures prescribed
in Rule 14a-8 under the Securities Exchange Act of 1934. To be eligible for
inclusion in the proxy statement, shareholder proposals must be received by
First Community Financial Group no later than December 3, 2000. Additionally, if
notice of a shareholder proposal is received after February 16, 2001, the
persons named as proxies in the form of proxy will have discretionary authority
to vote on the shareholder proposal.
MISCELLANEOUS
Any shareholder may obtain without charge a copy of our Annual Report on Form
10-K filed with the Securities and Exchange Commission under the Securities
Exchange Act of 1934 for the year ended December 31, 1999. Written requests for
the Form 10-K should be addressed to James F. Arneson, First Community Financial
Group, Inc., 721 College Street, P.O. Box 3800, Lacey, Washington 98509-3800.
By Order of the Board of Directors
Lacey, Washington James F. Arneson
April 7, 2000 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.
- ------------------------------------------------------------------------------
30
<PAGE>
First Community Financial Group Inc.
and Subsidiaries
CONSOLIDATED FINANCIAL REPORT
December 31 1999
<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-31
<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, 1999 and 1998, and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the three years in the period ended December 31, 1999. 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, 1999 and 1998, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1999, in conformity with generally accepted
accounting principles.
KNIGHT VALE & GREGORY PLLC
January 28, 2000
Tacoma, Washington
F-1
<PAGE>
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
(Dollars in Thousands)
First Community Financial Group, Inc. and Subsidiaries
December 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
ASSETS
Cash and due from banks $ 10,349 $ 12,315
Interest bearing deposits in banks 136 127
Federal funds sold -- 2,815
Securities available for sale 28,439 35,070
Securities held to maturity (market value: 1999 - $701; 1998 - $734) 677 677
Loans held for sale 2,951 4,456
Loans 232,825 194,361
Allowance for credit losses (5,825) (2,290)
NET LOANS 227,000 192,071
Premises and equipment 9,187 9,474
Foreclosed real estate 1,890 1,996
Accrued interest receivable 1,226 1,120
Cash value of life insurance 3,014 2,959
Goodwill 7,085 7,493
Other assets 1,819 993
TOTAL ASSETS $ 293,773 $ 271,566
LIABILITIES
Deposits:
Demand $ 42,481 $ 46,538
Savings and interest-bearing demand 105,519 109,544
Time deposits 97,527 79,505
TOTAL DEPOSITS 245,527 235,587
Federal funds purchased 3,200 --
Short-term borrowings 10,335 500
Long-term debt 2,030 2,808
Accrued interest payable 299 297
Other liabilities 1,764 2,033
TOTAL LIABILITIES 263,155 241,225
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: 1999 - 2,177,167; 1998 - 2,126,147 5,443 5,315
Surplus 23,428 22,849
Retained earnings 2,855 2,757
Accumulated other comprehensive income (loss) (728) 28
Debt related to KSOP (380) (608)
TOTAL STOCKHOLDERS' EQUITY 30,618 30,341
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 293,773 $ 271,566
</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, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
INTEREST INCOME
Loans $ 20,518 $ 19,811 $ 18,821
Federal funds sold and deposits in banks 112 532 836
Investment securities:
Taxable 1,560 2,799 1,339
Non-taxable 380 270 164
TOTAL INTEREST INCOME 22,570 23,412 21,160
INTEREST EXPENSE
Deposits 7,042 8,390 7,884
Other 450 295 155
TOTAL INTEREST EXPENSE 7,492 8,685 8,039
NET INTEREST INCOME 15,078 14,727 13,121
PROVISION FOR CREDIT LOSSES 3,730 425 1,015
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES 11,348 14,302 12,106
NON-INTEREST INCOME
Service charges on deposit accounts 1,949 1,931 1,610
Origination fees and gains on sales of loans 1,160 1,271 750
Life insurance proceeds -- -- 1,110
Other operating income 1,510 1,681 693
TOTAL NON-INTEREST INCOME 4,619 4,883 4,163
NON-INTEREST EXPENSES
Salaries 6,325 6,446 5,590
Employee benefits 1,620 1,418 1,961
Occupancy 1,003 978 707
Equipment 1,200 1,239 1,305
Repurchase of stock options -- -- 1,133
Other 3,961 4,258 5,087
TOTAL NON-INTEREST EXPENSES 14,109 14,339 15,783
OPERATING INCOME BEFORE INCOME TAXES 1,858 4,846 486
INCOME TAXES (BENEFIT) 498 1,241 (233)
NET INCOME $ 1,360 $ 3,605 $ 719
EARNINGS PER SHARE
Basic $ .64 $ 1.74 $ .36
Diluted .60 1.62 .34
</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, 1999, 1998 and 1997
<TABLE>
<CAPTION>
ACCUMULATED
SHARES OF OTHER DEBT
COMMON COMMON RETAINED COMPREHENSIVE RELATED
STOCK STOCK SURPLUS EARNINGS INCOME (LOSS) TO KSOP TOTAL
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996 1,698,505 $4,246 $13,745 $3,186 $(13) $(245) $20,919
Comprehensive income:
Net income -- -- -- 719 -- -- 719
Other comprehensive income,
net of tax:
Change in unrealized gain
on securities -- -- -- -- 81 -- 81
COMPREHENSIVE INCOME 800
Stock options exercised 17,897 44 159 -- -- -- 203
5% stock dividend 93,678 234 2,062 (2,309) -- -- (13)
Stock repurchased (122,570) (306) (2,206) -- -- -- (2,512)
Stock issued for purchase of
Prairie Security Bank 307,916 770 6,699 -- -- -- 7,469
Net increase in debt related
to KSOP -- -- -- -- -- (701) (701)
BALANCE, DECEMBER 31, 1997 1,995,426 4,988 20,459 1,596 68 (946) 26,165
Comprehensive income:
Net income -- -- -- 3,605 -- -- 3,605
Other comprehensive loss,
net of tax:
Change in unrealized loss
on securities, net of
reclassification adjustment -- -- -- -- (40) -- (40)
COMPREHENSIVE INCOME 3,565
Stock options exercised 35,680 89 188 -- -- -- 277
5% stock dividend 99,187 248 2,182 (2,444) -- -- (14)
Stock repurchased (4,146) (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 debt related
to KSOP -- -- -- -- -- 338 338
BALANCE, DECEMBER 31, 1998 2,126,147 5,315 22,849 2,757 28 (608) 30,341
</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, 1999, 1998 and 1997
<TABLE>
<CAPTION>
ACCUMULATED
SHARES OF OTHER DEBT
COMMON COMMON RETAINED COMPREHENSIVE RELATED
STOCK STOCK SURPLUS EARNINGS INCOME (LOSS) TO KSOP TOTAL
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1998 2,126,147 $5,315 $22,849 $2,757 $ 28 ($608) $30,341
Comprehensive income:
Net income -- -- -- 1,360 -- -- 1,360
Other comprehensive loss,
net of tax:
Change in unrealized loss
on securities -- -- -- -- (756) -- (756)
COMPREHENSIVE INCOME 604
Stock options exercised 51,020 128 402 -- -- -- 530
Cash dividends declared
($.58 per share) -- -- -- (1,262) -- -- (1,262)
Income tax benefit from
exercise of stock options -- -- 177 -- -- -- 177
Net decrease in debt related
to KSOP -- -- -- -- -- 228 228
BALANCE, DECEMBER 31, 1999 2,177,167 $5,443 $23,428 $2,855 ($728) ($380) $30,618
</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, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,360 $ 3,605 $ 719
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Provision for credit losses 3,730 425 1,015
Depreciation and amortization 1,096 1,296 1,231
Deferred income taxes (benefit) (1,119) 327 (225)
Stock dividends received (122) (129) (110)
Amortization of goodwill 408 391 290
Life insurance proceeds -- -- 1,419
Origination of loans held for sale (48,753) (55,868) (38,029)
Proceeds from sales of loans held for sale 50,258 55,716 34,451
(Increase) decrease in cash value of life insurance (7) 200 60
Gain on sales of foreclosed real estate (11) (431) (11)
(Increase) decrease in accrued interest receivable (106) 371 (657)
Increase (decrease) in accrued interest payable 2 (106) 174
Other - net 432 956 (675)
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 7,168 6,753 (348)
CASH FLOWS FROM INVESTING ACTIVITIES
Activity in securities available for sale:
Sales -- 4,416 --
Maturities, prepayments and calls 19,507 39,698 15,164
Purchases (13,764) (37,246) (44,652)
Activity in securities held to maturity:
Maturities, prepayments and calls -- 280 2,220
Net (increase) decrease in interest bearing deposits in banks (9) 5,521 5,217
Net (increase) decrease in federal funds sold 2,815 8,185 (7,000)
Net increase in loans (39,345) (2,176) (28,795)
Proceeds from sales of foreclosed assets 753 2,745 258
Additions to premises and equipment (1,228) (771) (2,324)
Proceeds from sales of premises and equipment 444 746 --
Purchase of Prairie Security Bank, net of cash acquired -- -- (880)
Deposit premium paid on branches purchased -- -- (2,997)
Other - net -- (55) 293
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (30,827) 21,343 (63,496)
</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, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits $ 9,940 ($27,534) $ 68,842
Net increase in short-term borrowings 13,035 500 --
Proceeds from exercise of stock options 530 277 203
Proceeds from issuance of long-term debt -- -- 2,750
Repayment of long-term debt (550) (550) (2,170)
Repurchase of common stock -- (80) (2,512)
Payment for fractional shares -- (14) (13)
Payment of cash dividends (1,262) -- --
Other - net -- -- (103)
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 21,693 (27,401) 66,997
NET INCREASE (DECREASE) IN CASH AND DUE FROM BANKS (1,966) 695 (3,153)
CASH AND DUE FROM BANKS
Beginning of year 12,315 11,620 8,467
END OF YEAR $ 10,349 $ 12,315 $ 11,620
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for:
Interest $ 7,490 $ 8,791 $ 7,865
Income taxes 1,105 865 320
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING
AND FINANCING ACTIVITIES
Foreclosed real estate acquired in settlement of loans $ 822 $ 2,318 $ 1,222
Financed sale of foreclosed real estate 136 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
Compensation expense for issuance of stock options -- 10 --
Fair value adjustment of securities available for sale, net (756) (40) 81
Net increase (decrease) in unearned KSOP shares (228) (338) 701
Income tax benefit from exercise of stock options 177 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, 1999 and 1998
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 15 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). 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 the 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. Material estimates that are particularly susceptible to
significant change in the near term relate to the determination of the allowance
for credit losses and the valuation of foreclosed real estate and deferred tax
assets.
Certain prior year amounts have been reclassified to conform to the 1999
presentation. The reclassifications had no effect on net income or retained
earnings as previously reported. All dollar amounts, except per share
information, are stated in thousands.
SECURITIES AVAILABLE FOR SALE
Securities available for sale consist of debt securities which may be sold to
implement the Bank's asset/liability management strategies and in response to
changes in interest rates and similar factors, and certain equity securities.
Securities available for sale are reported at fair value. Unrealized gains and
losses, net of the related deferred tax effect, are reported as a net amount in
a separate component of stockholders' equity entitled "accumulated other
comprehensive income (loss)." 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, 1999 and 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
TRANSFERS OF FINANCIAL ASSETS
Transfers of financial assets are accounted for as sales when control over the
assets has been surrendered. Control over transferred assets is deemed to be
surrendered when (1) the assets have been isolated from the Bank, (2) the
transferee obtains the right (free of conditions that constrain it from taking
advantage of that right) to pledge or exchange the transferred assets, and (3)
the Bank does not maintain effective control over the transferred assets through
an agreement to repurchase them before their maturity.
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, unless they are
well secured and in the process of collection. 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 is inherently
subjective, as it 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. Loans that
experience insignificant payment delays and payment shortfalls are generally not
classified as impaired. Management determines the significance of payment delays
and payment shortfalls on a case-by-case basis, taking into consideration all of
the circumstances surrounding the loan and the borrower, including the length of
the delay, the reasons for the delay, the borrower's prior payment record, and
the amount of shortfall in relation to the principal and interest owed. 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.
(CONTINUED)
F-9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
First Community Financial Group, Inc. and Subsidiaries
December 31, 1999 and 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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 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 recorded 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 recorded 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.
The Company files a consolidated income tax return with its subsidiaries. The
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 of the effects of all options granted on or after
January 1, 1995 have been provided in accordance with SFAS No. 123, ACCOUNTING
FOR STOCK- BASED COMPENSATION.
(CONTINUED)
F-10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
First Community Financial Group, Inc. and Subsidiaries
December 31, 1999 and 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 balance
sheets:
CASH AND SHORT-TERM INSTRUMENTS
The recorded 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 recorded values of restricted
equity securities approximate fair values.
LOANS
For variable rate loans that reprice frequently and have no
significant change in credit risk, fair values are based on recorded
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 recorded amounts). The recorded 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 recorded amounts of federal funds purchased and 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 recorded 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.
(CONTINUED)
F-11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
First Community Financial Group, Inc. and Subsidiaries
December 31, 1999 and 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONCLUDED)
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.
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, 2000. The Company had no
derivatives as of December 31, 1999, 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 in cash and issued 307,916 shares of common
stock totaling $7,469. The acquisition was treated as a purchase for accounting
purposes. Accordingly, the assets and liabilities of PSB were 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. Amortization of goodwill over a 25-year period will result in a charge
to earnings of approximately $208 per year.
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
were 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.
Amortization of goodwill over a 15-year period will result in a charge to
earnings of approximately $200 per year.
F-12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
First Community Financial Group, Inc. and Subsidiaries
December 31, 1999 and 1998
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, 1999 and 1998 were approximately
$1,240 and $1,945, respectively.
NOTE 4 - DEBT AND EQUITY SECURITIES
Debt and equity securities have been classified according to management's
intent. The recorded amounts of securities and their fair value at December 31
were as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
SECURITIES AVAILABLE FOR SALE
DECEMBER 31, 1999
U.S. Government and agency securities $7,731 $-- $530 $7,201
Equity securities 1,774 -- -- 1,774
Corporate securities 5,339 -- 137 5,202
Mortgage backed securities 7,154 10 137 7,027
State and municipal securities 7,544 6 315 7,235
$29,542 $16 $1,119 $28,439
DECEMBER 31, 1998
U.S. Government and agency securities $15,578 $114 $255 $15,437
Equity securities 1,661 -- -- 1,661
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
$35,027 $311 $268 $35,070
SECURITIES HELD TO MATURITY
DECEMBER 31, 1999
State and municipal securities $677 $25 $1 $701
DECEMBER 31, 1998
State and municipal securities $677 $58 $1 $734
</TABLE>
(CONTINUED)
F-13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
First Community Financial Group, Inc. and Subsidiaries
December 31, 1999 and 1998
NOTE 4 - DEBT AND EQUITY SECURITIES (CONCLUDED)
The contractual maturities of debt securities held to maturity and available for
sale at December 31, 1999 are shown below. Expected maturities may differ from
contractual maturities because borrowers may have the right to call or prepay
obligations, with or without call or prepayment penalties.
<TABLE>
<CAPTION>
HELD TO MATURITY AVAILABLE FOR SALE
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 $ -- $ -- --% $ 564 $ 564 6.11%
Due after one year through five years 275 280 5.59 11,126 10,850 5.95
Due after five years through ten years 402 421 6.12 6,764 6,465 5.41
Due after ten years -- -- -- 9,314 8,786 6.47
$677 $701 $27,768 $26,665
</TABLE>
Securities recorded at approximately $8,036 at December 31, 1999 and $3,533 at
December 31, 1998 were pledged to secure public deposits and for other purposes
required or permitted by law.
Gross realized gains and losses on sales of securities available for sale were
$11 and $5, respectively, in 1998.
NOTE 5 - LOANS
Loans at December 31 consist of the following:
<TABLE>
<CAPTION>
1999 PERCENT OF 1998 PERCENT OF
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
<S> <C> <C> <C> <C>
Commercial $ 34,981 15.02% $ 29,446 15.15%
Real estate:
Residential 1-4 family 23,493 10.09 24,772 12.74
Commercial 146,710 63.02 116,348 59.86
Construction 19,169 8.23 17,390 8.95
Consumer 8,472 3.64 6,405 3.30
TOTAL LOANS $232,825 100.00% $194,361 100.00%
</TABLE>
(CONTINUED)
F-14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
First Community Financial Group, Inc. and Subsidiaries
December 31, 1999 and 1998
NOTE 5 - LOANS (CONCLUDED)
Changes in the allowance for credit losses for the years ended December 31 are
as follows:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Balance at beginning of year $ 2,290 $ 2,122 $ 1,420
Provision charged to operations 3,730 425 1,015
Transfer from Prairie Security Bank -- -- 469
Charge-offs (247) (411) (807)
Recoveries 52 154 25
NET CHARGE-OFFS (195) (257) (782)
BALANCE AT END OF YEAR $ 5,825 $ 2,290 $ 2,122
Ratio of net charge-offs to average loans outstanding .09% .13% .44%
</TABLE>
Following is a summary of information pertaining to impaired loans:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
DECEMBER 31
Impaired loans without a valuation allowance $ 1,046 $ 2,130 $ 3,389
Impaired loans with a valuation allowance 3,680 362 992
TOTAL IMPAIRED LOANS $ 4,726 $ 2,492 $ 4,381
VALUATION ALLOWANCE RELATED TO IMPAIRED LOANS $ 3,347 $ 227 $ 139
YEARS ENDED DECEMBER 31
Average investment in impaired loans $ 1,495 $ 3,544 $ 3,258
Interest income recognized on a cash basis on impaired loans -- -- --
</TABLE>
At December 31, 1999, there were no commitments to lend additional funds to
borrowers whose loans were impaired. Loans over 90 days past due still accruing
interest were $28 and $471 at December 31, 1999 and 1998, 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 1999 and 1998. Total loans outstanding at December 31, 1999 and 1998 to
key officers and directors were $13,806 and $8,123, respectively. During 1999,
advances totaled $9,637, and repayments totaled $3,954 on these loans.
F-15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
First Community Financial Group, Inc. and Subsidiaries
December 31, 1999 and 1998
NOTE 6 - PREMISES AND EQUIPMENT
The components of premises and equipment at December 31 are as follows:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Land $ 1,372 $ 1,636
Buildings and leasehold improvements 7,493 7,785
Equipment, furniture and fixtures 6,379 5,685
Construction in progress 66 148
TOTAL COST 15,310 15,254
Less accumulated depreciation and amortization 6,123 5,780
TOTAL PREMISES AND EQUIPMENT $ 9,187 $ 9,474
</TABLE>
The Bank leases equipment and premises under operating leases. Rental expense of
leased premises and equipment was $309, $260 and $145 for 1999, 1998 and 1997,
respectively, which is included in occupancy expense.
The Company has subleased portions of its premises to other companies under
noncancellable agreements which expire from September 2000 to December 2001. The
agreements require annual rentals ranging from $10 to $21.
Minimum net rental commitments under noncancellable leases having an original or
remaining term of more than one year are as follows at December 31, 1999:
2000 $ 302
2001 288
2002 288
2003 175
2004 91
Thereafter 977
TOTAL MINIMUM PAYMENTS REQUIRED $2,121
Certain leases contain renewal options of five years and escalation clauses
based on increases in property taxes and other costs.
The minimum lease payments have not been reduced by minimum sublease rentals of
$73 due in the future under the noncancellable subleases mentioned in the above
paragraph.
F-16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
First Community Financial Group, Inc. and Subsidiaries
December 31, 1999 and 1998
NOTE 7 - DEPOSITS
The aggregate amount of time deposits with balances in excess of one hundred
thousand dollars was approximately $27,773 and $14,065 at December 31, 1999 and
1998, respectively.
At December 31, 1999, the scheduled maturities of time deposits are as follows:
2000 $88,651
2001 8,263
2002 427
2003 59
2004 and thereafter 127
TOTAL $97,527
NOTE 8 - SHORT-TERM BORROWINGS
Short-term borrowings at December 31, 1999 are as follows:
Demand note issued to U. S. Treasury, bearing interest at
the federal funds rate less .25% (4.78% at December 31,
1999), due on demand, secured by securities pledged to the
Federal Reserve Bank of San Francisco in the amount of $5,713. $ 3,335
Note due to the Federal Home Loan Bank of Seattle, bearing
interest at 4.5%, due January 2000. The Bank has entered
into an Advances, Security and Deposit Agreement ("Agreement")
with the Federal Home Loan Bank of Seattle, which allows it
to borrow 10% of the Bank's assets. Under the Agreement,
virtually all the Bank's assets, not otherwise encumbered,
are pledged as collateral for advances. 7,000
TOTAL SHORT-TERM BORROWINGS $10,335
In addition, the Bank has agreements with commercial banks for lines of credit
totaling $6,000, none of which were used during 1999. The lines will mature in
April 2000.
F-17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
First Community Financial Group, Inc. and Subsidiaries
December 31, 1999 and 1998
NOTE 9 - LONG-TERM DEBT
Long-term debt at December 31 is as follows:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Note payable on behalf of and paid by the Company's KSOP, maturing March 2002;
due in monthly principal installments of $15, plus interest at 90% of prime rate
(7.65% at December 31, 1999), collateralized by 20,578
shares of Company stock; guaranteed by the Company and the Bank $ 380 $ 608
Note payable to Key Bank, maturing July 2002; due in annual installments of
$550, plus monthly installments of interest at prime rate minus 85 basis
points (7.65% at December 31, 1999), collateralized by investment in
First Community Bank 1,650 2,200
$2,030 $2,808
</TABLE>
Principal reductions due on the above indebtedness for the years ending December
31 are as follows: 2000 - $728; 2001 - $728; and 2002 - $574.
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, 1999.
NOTE 10 - 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:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Current (refundable) $ 1,617 $ 914 $ (8)
Deferred (benefit) (1,119) 327 (225)
TOTAL INCOME TAXES (BENEFIT) $ 498 $ 1,241 $(233)
</TABLE>
(CONTINUED)
F-18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
First Community Financial Group, Inc. and Subsidiaries
December 31, 1999 and 1998
NOTE 10 - INCOME TAXES (CONCLUDED)
The following is a reconciliation between the statutory and the effective
federal income tax rate for the years ended December 31:
<TABLE>
<CAPTION>
1999 1998 1997
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 $ 632 34.0% $ 1,648 34.0% $ 165 34.0%
Adjustments resulting from:
Tax-exempt income (144) (7.8) (95) (2.0) (48) (9.9)
Life insurance proceeds -- -- -- -- (377) (77.6)
Goodwill amortization 70 3.8 65 1.3 70 14.4
Tax credits (129) (6.9) (308) (6.3) -- --
Other 69 3.7 (69) (1.4) (43) (8.8)
TOTAL INCOME TAXES (BENEFIT) $ 498 26.8% $ 1,241 25.6% ($ 233) (47.9%)
</TABLE>
The tax effects of temporary differences that give rise to significant portions
of deferred tax assets and liabilities at December 31 are:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
DEFERRED TAX ASSETS
Allowance for credit losses, in excess of tax reserves $ 1,864 $ 670
Deferred compensation and incentive bonuses 492 350
Book depreciation taken in excess of tax depreciation 26 --
Unrealized loss on securities available for sale 376 --
Other deferred tax assets 98 71
TOTAL DEFERRED TAX ASSETS 2,856 1,091
DEFERRED TAX LIABILITIES
Tax depreciation taken in excess of book depreciation -- 61
Deferred income 1,712 1,292
Unrealized gain on securities available for sale -- 15
Other deferred tax liabilities -- 89
TOTAL DEFERRED TAX LIABILITIES 1,712 1,457
NET DEFERRED TAX ASSETS (LIABILITIES) $ 1,144 ($ 366)
</TABLE>
F-19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
First Community Financial Group, Inc. and Subsidiaries
December 31, 1999 and 1998
NOTE 11 - 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 in insurance proceeds. Other income of $1,110 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 15). 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, and are included in employee benefits expense on the
consolidated statements of income.
NOTE 12 - 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. In addition, 66,042 stock options were
repurchased for $1,133, which was recorded in non-interest expenses.
NOTE 13 - 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:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Commitments to extend credit:
Real estate secured $19,105 $18,444
Credit card lines 1,814 1,252
Other 22,552 18,715
TOTAL COMMITMENTS TO EXTENDED CREDIT $43,471 $38,411
Standby letters of credit $ 1,060 $ 1,116
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Since many
of the commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements. The
Bank's experience has been that approximately 70% of loan commitments are drawn
upon by customers. The Bank evaluates each customer's creditworthiness on a
case-by-case basis. The amount of collateral obtained, if deemed necessary by
the Bank upon extension of credit, is based on management's credit evaluation of
the party. Collateral held varies, but may include accounts receivable,
inventory, property and equipment, residential real estate, and income-producing
commercial properties.
(CONTINUED)
F-20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
First Community Financial Group, Inc. and Subsidiaries
December 31, 1999 and 1998
NOTE 13 - COMMITMENTS AND CONTINGENT LIABILITIES (CONCLUDED)
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.
CONTINGENCIES
Because of the nature of its activities, the Company is from time to time
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 14 - 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 13. 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 lending arrangements 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 $6,000.
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 defaults, and the value of any existing collateral
become worthless.
NOTE 15 - 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 based on the
proportion of debt paid and allocated to active employees. 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.
(CONTINUED)
F-21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
First Community Financial Group, Inc. and Subsidiaries
December 31, 1999 and 1998
NOTE 15 - BENEFIT PLANS (CONTINUED)
EMPLOYEE STOCK OWNERSHIP PLAN (CONCLUDED)
Eligible employees may defer up to 15% 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. Company contributions to this plan totaled $300, $334
and $320 in 1999, 1998 and 1997, respectively. Cash dividends paid on
unallocated shares which are collateral for debt are paid to reduce the
principal of the debt. Dividends paid on allocated shares are distributed to the
employee account.
The KSOP shares as of December 31 were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Allocated shares 162,844 143,657 113,830
Unallocated shares 20,578 32,893 48,241
TOTAL KSOP SHARES 183,422 176,550 162,071
Estimated fair value of unallocated shares $493,872 $953,897 $1,181,905
</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, 1999, 1998 and 1997, outstanding put options were not
material.
INCENTIVE COMPENSATION PLAN
Incentive compensation is awarded to officers and qualified employees based on
the financial performance of the Company. Awards are payable if the Company and
its subsidiaries meet earnings and other performance objectives and are
determined as a percentage of their base salary. Fees paid to directors are also
adjusted annually based on the financial performance of the Company. There were
no awards under the plan for 1999. Awards for 1998 and 1997 totaled $262 and
$35, 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 $409, $158 and $348 in 1999, 1998 and 1997, respectively.
Benefits to employees may be funded by life insurance policies purchased by the
Company, which had cash surrender values of $2,870, $2,818 and $2,740 at
December 31, 1999, 1998 and 1997, respectively. Liabilities to employees, which
are being accrued over their expected time to retirement, were $718, $341 and
$263 at December 31, 1999, 1998 and 1997, respectively.
(CONTINUED)
F-22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
First Community Financial Group, Inc. and Subsidiaries
December 31, 1999 and 1998
NOTE 15 - BENEFIT PLANS (CONCLUDED)
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 $144, $141 and $419 at December 31,
1999, 1998 and 1997, respectively. Accrued liabilities to directors at December
31, 1999, 1998 and 1997 totaled $216, $218 and $183, respectively. No expenses
associated with this plan were incurred in 1999. Expenses associated with this
plan were $35 and $49 in 1998 and 1997, respectively.
NOTE 16 - 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.
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.
NOTE 17 - 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
1999, 1998 and 1997 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:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Net income:
As reported $ 1,360 $ 3,605 $ 719
Pro forma 1,081 3,159 333
Earnings per share:
Basic:
As reported $ .64 $ 1.74 $ .36
Pro forma .51 1.53 .17
Diluted:
As reported .60 1.62 .34
Pro forma .49 1.48 .17
</TABLE>
(CONTINUED)
F-23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
First Community Financial Group, Inc. and Subsidiaries
December 31, 1999 and 1998
NOTE 17 - STOCK OPTION PLANS (CONTINUED)
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:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Dividend yield 1.9% --% --%
Expected life 10 years 10 years 10 years
Risk-free interest rate 4.7% to 5.2% 4.9% 6.1% to 6.3%
</TABLE>
The weighted average fair value of options granted during 1999, 1998 and 1997
was $6.67, $11.48 and $7.90, 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 1999, 1998 and 1997 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.
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
Granted 26,000 -- 26,000 30.00
Exercised (23,862) (27,158) (51,020) 10.37
Forfeited/repurchased (2,000) (2) (2,004) 29.96
UNDER OPTION AT DECEMBER 31, 1999 297,932 59,670 357,602 17.13
Options exercisable at December 31, 1999 203,006 57,670 260,676
</TABLE>
(CONTINUED)
F-24
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
First Community Financial Group, Inc. and Subsidiaries
December 31, 1999 and 1998
NOTE 17 - STOCK OPTION PLANS (CONCLUDED)
Options becoming exercisable under both stock option plans in future years
ending December 31 are as follows: 2000 - 43,505; 2001 - 26,141; 2002 - 15,880;
2003 - 5,000 and 2004 - 4,400.
Options for 52,245 and 40,000 shares remain available to be granted under the
director and employee plans, respectively, at December 31, 1999.
The following information summarizes information about stock options outstanding
at December 31, 1999:
<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 $10.00 33,555 2.8 $ 8.76 32,955 $ 8.92
$11.00 to $14.00 130,409 4.6 13.76 130,409 13.76
$17.28 108,238 6.3 17.28 72,352 17.28
$20.00 to $23.00 51,400 7.9 22.33 20,760 22.31
$30.00 34,000 9.7 30.00 4,200 30.00
357,602 260,676
</TABLE>
NOTE 18 - CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY
CONDENSED BALANCE SHEETS - DECEMBER 31
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
ASSETS
Cash $ 258 $ 432
Investment in subsidiaries 31,954 32,423
Premises and equipment -- 2
Other assets 518 374
TOTAL ASSETS $32,730 $33,231
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Long-term debt $ 2,030 $ 2,808
Other liabilities 82 82
TOTAL LIABILITIES 2,112 2,890
STOCKHOLDERS' EQUITY 30,618 30,341
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $32,730 $33,231
</TABLE>
(CONTINUED)
F-25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
First Community Financial Group, Inc. and Subsidiaries
December 31, 1999 and 1998
NOTE 18 - CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY (CONTINUED)
CONDENSED STATEMENTS OF INCOME - YEARS ENDED DECEMBER 31
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
OPERATING INCOME
Dividends received from subsidiaries $ 1,215 $ -- $ 2,900
Interest 4 3 17
TOTAL OPERATING INCOME 1,219 3 2,917
OPERATING EXPENSES
Interest 142 197 83
Other 54 113 88
Repurchase of stock options -- -- 1,133
TOTAL OPERATING EXPENSES 196 310 1,304
INCOME (LOSS) BEFORE INCOME TAXES AND EQUITY
IN UNDISTRIBUTED INCOME OF SUBSIDIARIES 1,023 (307) 1,613
INCOME TAXES (BENEFIT) (49) 197 (437)
INCOME (LOSS) BEFORE EQUITY IN UNDISTRIBUTED
INCOME OF SUBSIDIARIES 1,072 (504) 2,050
EQUITY IN UNDISTRIBUTED INCOME OF SUBSIDIARIES/
(DIVIDENDS IN EXCESS OF NET INCOME OF SUBSIDIARIES) 288 4,109 (1,331)
NET INCOME $ 1,360 $ 3,605 $ 719
CONDENSED STATEMENTS OF CASH FLOWS - YEARS ENDED DECEMBER 31
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,360 $ 3,605 $ 719
Adjustments to reconcile net income to net cash
provided by operating activities:
(Equity in undistributed income of subsidiaries)
dividends in excess of net income of subsidiaries (288) (4,109) 1,331
Decrease in due from subsidiaries -- 130 2,347
Depreciation 2 6 9
Other - net 34 746 (434)
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,108 378 3,972
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)
</TABLE>
(CONTINUED)
F-26
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
First Community Financial Group, Inc. and Subsidiaries
December 31, 1999 and 1998
NOTE 18 - CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY (CONCLUDED)
CONDENSED STATEMENTS OF CASH FLOWS - YEARS ENDED DECEMBER 31
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from exercise of stock options $ 530 $ 277 $ 203
Payment for fractional shares -- (14) (13)
Repurchase of common stock -- (80) (2,512)
Proceeds from issuance of long-term debt -- -- 2,750
Payments on long-term debt (550) (550) --
Payment of dividends (1,262) -- --
Other -- -- (103)
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (1,282) (367) 325
NET INCREASE (DECREASE) IN CASH (174) 11 (22)
CASH
Beginning of year 432 421 443
END OF YEAR $ 258 $ 432 $ 421
</TABLE>
NOTE 19 - 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).
(CONTINUED)
F-27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
First Community Financial Group, Inc. and Subsidiaries
December 31, 1999 and 1998
NOTE 19 - REGULATORY MATTERS (CONCLUDED)
As of December 31, 1999, 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:
<TABLE>
<CAPTION>
TO BE WELL CAPITALIZED
UNDER PROMPT
CAPITAL ADEQUACY CORRECTIVE ACTION
ACTUAL PURPOSES PROVISIONS
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
<S> <C> <C> <C> <C> <C> <C>
DECEMBER 31, 1999
TIER 1 CAPITAL (TO AVERAGE ASSETS):
Consolidated $24,261 8.47% $11,463 4.00% N/A N/A
FCB 25,597 8.95 11,439 4.00 $14,299 5.00%
TIER 1 CAPITAL (TO RISK-WEIGHTED ASSETS):
Consolidated 24,261 8.94 10,850 4.00 N/A N/A
FCB 25,597 9.44 10,842 4.00 16,263 6.00
TOTAL CAPITAL (TO RISK-WEIGHTED ASSETS):
Consolidated 27,682 10.21 21,700 8.00 N/A N/A
FCB 29,015 10.70 21,684 8.00 27,105 10.00
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>
Management believes, as of December 31, 1999, 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, 1999, all of the
Bank's retained earnings were available for dividend declaration to its parent
company without prior regulatory approval.
F-28
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
First Community Financial Group, Inc. and Subsidiaries
December 31, 1999 and 1998
NOTE 20 - FAIR VALUES OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments at December 31
were as follows:
<TABLE>
<CAPTION>
1999 1998
RECORDED FAIR RECORDED 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 $ 10,485 $ 10,485 $ 15,257 $ 15,257
Securities available for sale 28,439 28,439 35,418 35,418
Securities held to maturity 677 701 677 734
Loans held for sale 2,951 2,951 4,456 4,456
Loans receivable, net 227,000 224,991 192,071 191,649
FINANCIAL LIABILITIES
Deposits $245,527 $246,148 $235,587 $236,093
Long-term debt 2,030 2,030 2,808 2,808
Federal funds purchased 3,200 3,200 -- --
Short-term borrowings 10,335 10,335 500 500
</TABLE>
NOTE 21 - 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:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
OTHER OPERATING INCOME
Gain on sale of foreclosed real estate $ 11 $431 $ 11
Commission on sale of non-deposit investment products 640 594 273
OTHER OPERATING EXPENSE
Amortization of goodwill $408 $391 $290
State taxes 398 391 338
Advertising 184 162 440
Consulting 208 210 518
Telephone 273 232 243
</TABLE>
F-29
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
First Community Financial Group, Inc. and Subsidiaries
December 31, 1999 and 1998
NOTE 22 - 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, 1999
Basic earnings per share:
Net income $ 1,360 2,137,502 $ .64
Effect of dilutive securities:
Options -- 130,176 (.04)
Diluted earnings per share:
NET INCOME $ 1,360 2,267,678 $ .60
YEAR ENDED DECEMBER 31, 1998
Basic earnings per share:
Net income $ 3,605 2,070,491 $ 1.74
Effect of dilutive securities:
Options -- 159,769 (.12)
Diluted earnings per share:
NET INCOME $ 3,605 2,230,260 $ 1.62
YEAR ENDED DECEMBER 31, 1997
Basic earnings per share:
Net income $ 719 2,001,527 $ .36
Effect of dilutive securities:
Options -- 134,465 (.02)
Diluted earnings per share:
NET INCOME $ 719 2,135,992 $ .34
</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-30
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
First Community Financial Group, Inc. and Subsidiaries
December 31, 1999 and 1998
NOTE 23 - COMPREHENSIVE INCOME
Net unrealized losses included in other comprehensive income for the years ended
December 31 were computed as follows:
<TABLE>
<CAPTION>
BEFORE-TAX TAX NET-OF-TAX
AMOUNT BENEFIT AMOUNT
1999
<S> <C> <C> <C>
Unrealized holding losses arising during the year $ 1,146 $390 $756
Plus reclassification adjustments for gains realized
in net income -- -- --
NET UNREALIZED LOSSES $ 1,146 $390 $756
1998
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
1997
Unrealized holding gains arising during the year $ 123 $ 42 $ 81
Plus reclassification adjustments for gains realized
in net income -- -- --
NET UNREALIZED GAINS $ 123 $ 42 $ 81
</TABLE>
NOTE 24 - SUBSEQUENT EVENT
Subsequent to December 31, 1999, the Company declared a dividend in the amount
of $.10 per share to be paid on February 11, 2000 for shareholders of record as
of January 31, 2000.
F-31
<PAGE>
[FCFG
FIRST COMMUNITY FINANCIAL GROUP LOGO]
PROXY FOR 2000 ANNUAL MEETING
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS May 9, 2000
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, 2000 AT THE ANNUAL MEETING OF SHAREHOLDERS TO
BE HELD AT 6:00 PM ON MAY 9, 2000 OR ANY ADJOURNMENT OF SUCH MEETING.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE ELECTION OF EACH OF THE
FOLLOWING DIRECTORS:
<TABLE>
<S><C>
Please check X only A. PATRICK L. MARTIN / / FOR / / AGAINST / / ABSTAIN
ONE for EACH B. KEN F. PARSONS, SR. / / 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. SIGNATURES SHOULD
AGREE WITH NAME INDICATED TO THE RIGHT.
______________________________ Shareholder Name
SIGNATURE OF SHAREHOLDER(S) Shareholder Address Line 1
Shareholder Address Line 2
______________________________ Account ID: ______________ Shares: ______________
SIGNATURE OF SHAREHOLDER(S)
______ I PLAN TO ATTEND THE MEETING IN OLYMPIA, WASHINGTON,
AT 6:00 PM ON MAY 9, 2000.
PLEASE DATE, SIGN AND RETURN THIS PROXY. EVEN IF YOU PLAN TO ATTEND THE
MEETING, PLEASE RETURN THIS PROXY. THANK YOU.
</TABLE>
