FIRST COMMUNITY FINANCIAL GROUP INC - 10-Q Quarterly Report

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(mark one)

[X]	QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2002
	OR
[_]	TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______ to ______

Commission File Number 0-24024

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

Washington
(State or other jurisdiction
of incorporation or organization)

91-1277503
(IRS Employer Identification Number)

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

Registrant's telephone number: (360) 459-1100

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

[X]Yes [_] NO

Indicate the number of shares outstanding in each of the issuer's classes of common stock, as of the latest practicable date.

Title of Class
Common Stock, no stated value

Outstanding at November 7, 2002
2,194,468

First Community Financial Group, Inc.
Table of Contents

PART 1 - FINANCIAL INFORMATION		Page

Item 1	Financial Statements
	Condensed Consolidated Balance Sheets	3
	Condensed Consolidated Statements of Income and Comprehensive Income	4
	Condensed Consolidated Statement of Stockholders' Equity	5
	Condensed Consolidated Statements of Cash Flows	6
	Notes to Condensed Consolidated Financial Statements	7

Item 2	Management's Discussion and Analysis of Financial Condition and Results of Operations	9

Item 3	Quantitative and Qualitative Disclosures about Market Risk	15

Item 4	Disclosure Controls and Procedures	16

PART 2 - OTHER INFORMATION

Item 1	Legal Proceedings	None

Item 2	Changes in Securities and Use of Proceeds	None

Item 3	Defaults Upon Senior Securities	None

Item 4	Submission of Matters to Vote of Security Holders	None

Item 5	Other Information	None

Item 6	Exhibits and Reports on Form 8-K	16

SIGNATURES		17

PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements

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

(Dollars in Thousands)

		September 30, 2002		December 31, 2001
Assets
Cash and due from banks	$	23,311	$	21,383
Interest bearing deposits in banks		72		74
Federal funds sold		3,000		0
Securities available for sale		25,557		18,104
Securities held to maturity		505		506
Federal Home Loan Bank stock		1,205		1,985
Loans held for sale		9,234		6,196

Loans		303,079		288,701
Allowance for credit losses		4,628		4,088
Net Loans		298,451		284,613

Premises and equipment		9,999		10,382
Foreclosed real estate		4,789		4,387
Accrued interest received		1,666		1,471
Cash value of life insurance		8,755		8,453
Intangible assets		6,118		6,268
Other assets		1,708		801

Total assets	$	394,370	$	364,623

Liabilities
Deposits:
Non-interest bearing	$	59,967	$	55,013
Savings and interest bearing demand		129,093		123,093
Time deposits		133,027		135,624
Total deposits		322,087		313,730

Federal funds purchased		3,500		1,400
Short term borrowing		6,917		5,655
Long term debt		14,403		575
Accrued interest payable		382		364
Other liabilities		4,601		4,104
Total Liabilities		351,890		325,828

Stockholders' Equity
Common stock, no stated value per share; 10,000,000 shares authorized, 2,192,968 shares outstanding at September 30, 2002, and 2,186,681 shares outstanding at December 31, 2001		28,353		28,596
Retained earnings		13,892		9,912
Accumulated other comprehensive income		235		312
Debt related to KSOP		0		(25)
Total stockholders' equity		42,480		38,795

Total liabilities and stockholders' equity	$	394,370	$	364,623

See notes to condensed consolidated financial statements

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

(Dollars in thousands, except per share amounts)

		Three months ended September 30,			Nine months ended September 30,
		2002	2001		2002	2001
Interest income
Loans	$	6,987	7,609	$	20,305	21,533
Federal funds sold and deposits in banks		17	6		21	104
Investments		323	353		932	1,161
Total interest income		7,327	7,968		21,258	22,798
Interest Expense
Deposits		1,403	2,500		4,431	7,925
Other		229	80		381	244
Total interest expense		1,632	2,580		4,812	8,169
Net interest income		5,695	5,388		16,446	14,629
Provision for credit losses		623	513		1,608	958
Net interest income after provision
For credit losses		5,072	4,875		14,838	13,671
Non-interest income
Service charges on deposit accounts		768	709		2,240	1,649
Origination fees on mortgage loans sold		662	497		1,715	1,398
Other income		610	395		1,729	1,341
Total non-interest income		2,040	1,601		5,684	4,388
Non-interest expense
Salaries and employee benefits		2,451	2,433		7,086	7,000
Occupancy and equipment		620	618		1,847	1,824
Other expense		1,593	1,610		4,781	4,432
Total non-interest expense		4,664	4,661		13,714	13,256
Operating income before income taxes		2,448	1,815		6,808	4,803
Income Taxes		799	547		2,169	1,472

Net income	$	1,649	1,268	$	4,639	3,331
Other comprehensive income, net of tax
Unrealized holding gains (losses) on securities		275	114		(77)	553
Available for sale, arising during the period

Comprehensive income	$	1,924	1,382	$	4,562	3,884

Earnings per share data
Basic earnings per share	$	0.75	0.58	$	2.12	1.53
Diluted earnings per share	$	0.73	0.57	$	2.09	1.50

Weighted average number of common shares		2,190,951	2,181,459		2,188,605	2,178,716
Weighted average number of common shares
- including dilutive stock options		2,245,165	2,227,194		2,222,813	2,218,212
Return on average assets		1.70%	1.43%		1.64%	1.34%

Dividends per share	$	0.10	0.10	$	0.30	0.30

See notes to condensed consolidated financial statements

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

(Dollars in thousands)

		Common Stock		Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Debt Related To KSOP		Total

Balance, December 31, 2000	$	28,559	$	6,349	$	(332)	$	(203)	$	34,373

Net Income		--		3,331		--		--		3,331

Stock options exercised		27		--		--		--		27

Cash dividends ($0.30 per share)		--		(656)		--		--		(656)

Other comprehensive income		--		--		553		--		553

Net decrease in debt related
To KSOP		--		--		--		133		133

Balance, September 30, 2001	$	28,586	$	9,024	$	221	$	(70)	$	37,761

Balance, December 31, 2001	$	28,596	$	9,912	$	312	$	(25)	$	38,795

Net income		--		4,639		--		--		4,639

Stock options exercised		707		--		--		--		707

Cash dividends ($0.30 per share)		--		(659)		--		--		(659)

Stock repurchased		(950)		--		--		--		(950)

Other comprehensive loss		--		--		(77)		--		(77)

Net decrease in debt related
To KSOP		--		--		--		25		25

Balance, September 30, 2002	$	28,353	$	13,892	$	235	$	0	$	42,480

See notes to condensed consolidated financial statements

FIRST COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)

(Dollars in thousands)

		Nine months Ended September 30,
		2002		2001
Cash Flows from Operating Activities
Net Income	$	4,639	$	3,331
Adjustments to reconcile net income to net cash provided by (used in)
Operating activities:
Provision for credit losses		1,608		958
Depreciation and amortization		861		829
Amortization of intangible assets		150		306
Increase in cash value of life insurance		(302)		(5,147)
Other - net		(1,417)		89
Originations of loans held for sale		(66,979)		(64,242)
Proceeds from sales of loans held for sale		63,941		56,678
Net cash provided by operating activities		2,501		(7,198)

Cash Flows from Investing Activities
Net decrease in interest bearing deposits in banks		2		24
Net increase in Federal funds sold		(3,000)		0
Proceeds from maturities of available-for-sale securities		5,658		5,845
Purchase of securities available for sale		(13,149)		0
Proceeds from sale of Federal Home Loan Bank stock		870		0
Net increase in loans		(15,446)		(25,290)
Proceeds from sale of foreclosed real estate		325		95
Additions to premises and equipment		(478)		(1,189)
Net cash used by investing activities		(25,218)		(20,515)

Cash Flows from Financing Activities
Net increase in deposits		8,357		36,202
Net increase (decrease) in short-term borrowings		3,362		3,720
Sale of common stock		707		27
Repurchase of common stock		(950)		0
Increase in long term borrowings		14,403		0
Repayment of long-term borrowings		(575)		(683)
Payment of dividends		(659)		(656)
Net cash provided by financing activities		24,645		38,610

Net change in cash and due from banks		1,928		10,897

Cash and Due from Banks:
Beginning of period		21,383		12,640

End of period	$	23,311	$	23,537

Supplemental Disclosures of Cash Flow Information:
Cash payments for:
Interest	$	4,794	$	8,256
Taxes		2,215		1,095

Supplemental Disclosures of Non-Cash Investing Activities:
Other real estate acquired in settlement of loans	$	727	$	392
Fair value adjustment of securities available for sale, net		(77)		553
Decrease in guarantee of KSOP obligation		(25)		(133)

See notes to condensed consolidated financial statements

FIRST COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)

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, included in the Company's 2001 Annual Report to Shareholders. Operating results for the nine months ended September 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 September 30,				Nine Months Ended September 30,
		2002		2001		2002		2001

Basic EPS computation
Numerator - Net Income	$	1,649,000	$	1,268,000	$	4,639,000	$	3,331,000

Denominator - Weighted Average
common shares outstanding		2,190,951		2,181,459		2,188,605		2,178,716

Basic EPS	$	.75	$	.58	$	2.12	$	1.53

Diluted EPS computation
Numerator - Net Income	$	1,649,000	$	1,268,000	$	4,639,000	$	3,331,000

Denominator - Weighted Average		2,190,951		2,181,459		2,188,605		2,178,716
common shares outstanding

Effect of dilutive stock options		54,214		45,735		34,208		39,496

Weighted average common shares		2,245,165		2,227,194		2,222,813		2,218,212
and common stock equivalents

Diluted EPS	$	.73	$	.57	$	2.09	$	1.50

FIRST COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)

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 September 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, at June 30, 2002, the Company 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 acqu isitions, 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 $155,000 in the nine months ended September 30, 2002. The remaining intangible assets of $1,959,000 will continue to be amorti