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First Community Financial Group, Inc.
(Exact name of registrant as specified in its charter

721 College Street SE, P.O. Box 3800, Lacey, WA 98509
(Address of principal executive offices)

FIRST COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets (Unaudited)

FIRST COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Income and Comprehensive Income (Unaudited)

FIRST COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Stockholders' Equity (Unaudited)
Six Months Ended June 30, 2001 and 2002

1. Basis of Presentation

   The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, adjustments considered necessary for a fair presentation (consisting of normally recurring accruals) have been included. The interim condensed consolidated financial statements should be read in conjunction with the December 31, 2001 consolidated financial statements, including notes thereto, include in the Company's 2001 Annual Report to Shareholders. Operating results for the three months ended June 30, 2002 are not necessarily indicative of the results anticipated for the year ending December 31, 2002.

   The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the report amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

    

2. Basic and Diluted Earnings Per Share

   Basic and diluted earnings per share are calculated by dividing net income by the weighted average number of common shares outstanding during the periods presented. Diluted earnings per share assumes that all dilutive stock options outstanding are issued such that their dilutive effect is maximized.

    

   		Three Months Ended June 30,				Six Months Ended June 30,
   		2002		2001		2002		2001
   Basic EPS computation	$	1,644,000	$	992,000	$	2,990,000	$	2,063,000
   Numerator - Net Income
   Denominator - Weighted Average
   common shares outstanding		2,187,728		2,178,210		2,187,412		2,177,337
   Basic EPS	$	.75	$	.46	$	1.37	$	.95
   Diluted EPS computation	$	1,644,000	$	992,000	$	2,990,000	$	2,063,000
   Numerator - Net Income
   Denominator - Weighted Average		2,187,728		2,178,210		2,187,412		2,177,337
   common shares outstanding
   Effect of dilutive stock options		30,476		51,448		29,631		57,064
   Weighted average common shares		2,218,204		2,229,658		2,217,043		2,234,401
   and common stock equivalents
   Diluted EPS	$	.74	$	.44	$	1.35	$	.92

3. Recent Accounting Pronouncements

The Financial Accounting Standards Board issued Financial Accounting Standards No. 141, Business Combinations, and 142, Goodwill and Other Intangible Assets, in 2001, with an effective date of January 1, 2002. SFAS No. 141 requires that all business combinations entered into after June 30, 2001 be accounted for under the purchase method. SFAS No. 142 addresses how goodwill and other intangible assets should be accounted for after they have been initially recorded in the financial statements. Goodwill arising from business combinations prior to the effective date of this standard will no longer be amortized, starting in 2002, but will be subject to annual tests for impairment. In accordance with the provisions of SFAS No. 142, the Company has completed its transitional assessment of goodwill impairment and has determined that no adjustment for goodwill impairment is required. Other identifiable intangible assets, and certain unidentifiable intangible assets arising from certain acquisitions, will continue to be amortized using the same lives and methods. The Company has $4,159,000 of goodwill on which amortization has ceased effective January 1, 2002 which resulted in a reduction of amortization expense of $104,000 in the six months ended June 30, 2002. The remaining intangible assets of $2,009,000 will continue to be amortized.

In June 2001, the FASB also issued SFAS No. 143, Accounting for Asset Retirement Obligations. This statement addresses financial accounting and reporting obligations associated with the retirement of tangible long-lived assets and the associated annual retirement costs. This statement is effective for all fiscal years beginning after June 15, 2002. In August 2001 the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. The statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This statement is effective for fiscal years beginning after December 15, 2001. The Company does not anticipate that the adoption of SFAS Nos. 143 and 144 will have a material effect on its financial position or results of operations.

 

4. Subsequent Events

Acquisition of Harbor Bank, N.A.

On August 5, 2002 the Company announced the signing of a definitive agreement pursuant to which Harbor Bank, N.A. would merge with First Community Bank. Upon completion of the transaction, Harbor Bank shareholders, with a total of 643,000 shares of common stock outstanding, would receive $10.75 per share in cash for each share of Harbor Bank common stock. The per-share consideration may be reduced if Harbor Bank's Tier 1 capital plus reserve for possible loan and lease losses is less than $4,750,000 at the time of closing. The reduction in the per-share consideration would be calculated by dividing the amount by which Harbor Bank's Tier 1 capital plus loan loss reserve is below $4,750,000 by the total number of shares of Harbor Bank common stock outstanding at closing. Each outstanding option to purchase Harbor Bank common stock will be converted into the right to receive, for each share covered by such option, cash in the amount the per-share consideration exceeds the exercise price of the option. The Company expects to pay aggregate consideration of approximately $7.0 million.

The boards of directors of the Company, First Community Bank and Harbor Bank have each approved the definitive agreement. Completion of the transaction is expected late in the third quarter or early in the fourth quarter of 2002 and is subject to regulatory and shareholder approval.

 

Issuance of Trust Preferred Securities

On July 11 2002, the Company completed an offering of trust preferred securities and received net proceeds of approximately $12,600,000. The proceeds are expected to fund the acquisition of Harbor Bank, N.A., with the remaining balance added to the capital of First Community Bank. Trust preferred securities consist of the issuance of subordinated debt securities to a wholly owned subsidiary business trust, which then issues preferred stock to investors. The interest payments on the debt securities are approximately equal to the dividend payments on the preferred stock of the trust. The Company will be able to recognize a deduction of the interest cost for income tax purposes, while the net proceeds will qualify as Tier 1 capital.