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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
/X/ Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the fiscal year ended December 31, 2001 or
/ / Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
Commission file number 000-29829
PACIFIC FINANCIAL CORPORATION
(Exact Name of Registrant as specified in its Charter)
Washington 91-1815009
(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
300 East Market Street
Aberdeen, Washington 98520-5244
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (360) 533-8870
Securities Registered Pursuant to Section 12(b) of the Act:
None
----
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $1.00 per share
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods that the Registrant was
required to file such reports), and (2) has been subject to such requirements
for the past 90 days.
Yes No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [ ]
---
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of February 28, 2002 was $61,044,910.
As of February 28, 2002, there were issued and outstanding 2,491,629 shares of
the Registrant's Common Stock.
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DOCUMENTS INCORPORATED BY REFERENCE
PART III of Form 10-K - The definitive Proxy Statement filed with the Securities
and Exchange Commission in connection with Registrant's annual meeting to be
held April 17, 2002 (only portions of which are incorporated by reference).
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PACIFIC FINANCIAL CORPORATION
ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR
ENDED DECEMBER 31, 2001
TABLE OF CONTENTS
PART I Page
Item 1. Business 4
Item 2. Properties 12
Item 3. Legal Proceedings 13
Item 4. Submission of Matters to a Vote of Security Holders 13
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 13
Item 6. Selected Financial Data 14
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15
Item 7A. Quantitative and Qualitative Disclosure About Market Risk 28
Item 8. Financial Statements and Supplementary Data 29
Item 9. Changes in and Disagreements with Accountants on
Accounting And Financial Disclosure 29
PART III
Item 10. Directors and Executive Officers of the Registrant 29
Item 11. Executive Compensation 30
Item 12. Security Ownership of Certain Beneficial Owners
and Management 30
Item 13. Certain Relationships and Related Transactions 30
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K 30
SIGNATURES 61
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PART I
ITEM 1. Business
Pacific Financial Corporation (the Company) is a financial holding company
headquartered in Aberdeen, Washington. The Company owns one bank, Bank of the
Pacific (Pacific or the Bank), which is located in Washington. The Company
conducts its banking business through 10 branches located in communities
throughout Grays Harbor County, Pacific County, and Wahkiakum County in
Southwest Washington. At December 31, 2001, the Company had total consolidated
assets of $243.6 million, loans of $176.6 million, and deposits of $214.6
million. The Company was incorporated in the State of Washington on February 12,
1997, pursuant to a holding company reorganization of the Bank. Although an SEC
reporting company, the Company's stock is not listed on any exchange.
Forward Looking Information
Discussions of certain matters contained in this Annual Report on Form 10-K may
constitute forward-looking statements with the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21F of the Securities Exchange
Act of 1934, as amended (the "Exchange Act") and, as such, may involve risks and
uncertainties. These forward-looking statements may relate to, among other
things, economic conditions in the market areas in which the Bank operates, the
adequacy of the Bank's loan loss reserves, potential changes in interest rates,
and the competitive environment facing the Bank. The Company's actual results,
performance and achievements may differ materially from the results, performance
and achievements expressed or implied in such forward-looking statements.
The Bank
Bank of the Pacific was organized in 1978 and opened for business in 1979 to
meet the need for a regional community bank with local interests to serve the
small to medium-sized local businesses and professionals in the region. Services
offered by the Bank include commercial loans, installment loans, real estate
loans, and personal and business deposit products.
The Bank originates loans primarily in its local markets. The underwriting
policies focus on assessment of each borrower's ability to service and repay the
debt, and the availability of collateral that can be used to secure the loan.
Depending on the nature of the borrower and the purpose and amount of the loan,
the Bank's loans may be secured by a variety of collateral, including business
assets, real estate, and personal assets.
The Bank's commercial and agricultural loans consist primarily of secured
revolving operating lines of credit and business term loans, some of which may
be partially guaranteed by the Small Business Administration or the U.S.
Department of Agriculture.
Consumer installment loans and other loans represent a small percentage of total
outstanding loans and include home equity loans, auto loans, boat loans, and
personal lines of credit.
The Bank's primary sources of deposits are from individuals and businesses in
its local markets. A concerted effort has been made to attract deposits in the
local market areas through competitive pricing
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and delivery of quality products. These products include demand accounts,
negotiable order of withdrawal ("NOW") accounts, money market investment
accounts, savings accounts, and time deposits. The Bank traditionally has not
sought brokered deposits and does not intend to do so in the future.
The Bank operates under the banking laws of the State of Washington and the
rules and regulations of the Federal Deposit Insurance Corporation ("FDIC").
Competition
Competition in the banking industry is significant and has intensified as the
regulatory environment has grown more permissive. Banks face a growing number of
competitors and greater degree of competition with respect to the provision of
banking services and the attracting of deposits. The Company competes in Grays
Harbor County with well-established thrifts which are headquartered in the area
along with branches of large banks and small community banks with headquarters
outside the area. The Company competes with well-established branches of large
banks, thrifts and credit unions in Pacific and Wahkiakum Counties. Other
non-bank and non-depository institutions can be expected to increase competition
further as they offer bank type products.
The adoption of the Graham-Leach-Bliley Act of 1999 (the Financial Services
Modernization Act) in November of that year eliminated many of the barriers to
affiliation among providers of financial services and further opened the door to
business combinations involving banks, insurance companies, securities or
brokerage firms, and others. This regulatory change has led to further
consolidation in the financial services industry and the creation of financial
conglomerates which frequently offer multiple financial services, including
deposit services, brokerage and others. When combined with technological
developments such as the Internet that have reduced barriers to entry faced by
companies physically located outside the Company's market area, changes in the
market have resulted in increased competition and can be expected to result in
further increases in competition in the future.
Although it cannot guarantee that it will continue to do so, the Company has
been able to maintain a competitive advantage as a result of its status as a
local institution, offering products and services tailored to the needs of the
community. Further, because of the extensive experience of management in its
market area and the business contacts of management and the directors,
management believes the Company can continue to compete effectively.
According to the Market Share Report compiled by the Federal Home Loan Bank of
Seattle, as of June 30, 2000, the Company held a deposit market share of 53.4%
in Pacific County, 45.8% in Wahkiakum County and a 17.5% share in Grays Harbor
County.
Employees
As of December 31, 2001, the Bank employed 87 full time equivalent employees.
Management believes relations with its employees are good.
SUPERVISION AND REGULATION
The following generally refers to certain significant statutes and
regulations affecting the banking industry. This regulation is intended
primarily for the protection of depositors and not for the benefit of the
Company's shareholders. The following discussion is intended to provide a brief
summary and, therefore, is not complete and is qualified by the statutes and
regulations referenced. Changes in applicable laws or regulations may have a
material effect on the business and prospects of the Company.
5
The operations of the Company may also be affected by changes in the policies of
banking and other government regulators. The Company cannot accurately predict
the nature or extent of the effects on its business and earnings that fiscal or
monetary policies, or new federal or state laws, may have in the future.
THE COMPANY
General
As a financial holding company, the Company is subject to the Bank
Holding Company Act of 1956, as amended, ("BHCA") which places the Company under
the supervision of the Board of Governors of the Federal Reserve System (the
"Federal Reserve"). The Company must file annual reports with the Federal
Reserve and must provide it with such additional information as it may require.
In addition, the Federal Reserve periodically examines the Company and its
subsidiaries, including the Bank.
Bank Holding Company Regulation
In general, the BHCA limits a bank holding company to owning or
controlling banks and engaging in other banking-related activities. Bank holding
companies must obtain the Federal Resserve approval before they: (1) acquire
direct or indirect ownership or control of any voting shares of any bank that
results in total ownership or control, directly or indirectly, of more than 5%
of the voting shares of such bank; (2) merge or consolidate with another bank
holding company; or (3) acquire substantially all of the assets of another bank
or bank holding company.
Control of Nonbanks. With certain exceptions, the BHCA prohibits bank
holding companies from acquiring direct or indirect ownership or control of more
than 5% of the voting shares in any company that is not a bank or a bank holding
company unless the Federal Reserve determines that the activities of such
company are incidental or closely related to the business of banking. If a bank
holding company is well-capitalized and meets certain criteria specified by the
FRB, it may engage de novo in certain permissible nonbanking activities without
prior Federal Reserve approval.
Control Transactions. The Change in Bank Control Act of 1978, as
amended, requires a person (or group of persons acting in concert) acquiring
"control" of a bank holding company to provide the Federal Reserve with 60 days'
prior written notice of the proposed acquisition. Following receipt of this
notice, the Federal Reserve has 60 days within which to issue a notice
disapproving the proposed acquisition, but the Federal Reserve may extend this
time period for up to another 30 days. An acquisition may be completed before
expiration of the disapproval period if the Federal Reserve issues written
notice of its intent not to disapprove the transaction. In addition, any
"company" must obtain the Federal Reserve approval before acquiring 25% (5% if
the "company" is a bank holding company) or more of the outstanding shares or
otherwise obtaining control over the Company.
Financial Services Modernization Act
On November 12, 1999, the Financial Services Modernization Act was signed into
law. The Financial Services Modernization Act repeals the two affiliation
provisions of the Glass-Steagall Act: Section 20, which restricted the
affiliation of Federal Reserve member banks with firms "engaged principally" in
specified securities activities; and Section 32, which restricts officer,
director, or employee interlocks between a member bank and any company or person
"primarily engaged" in specified securities activities. In addition, the
Financial Services Modernization Act contains provisions that expressly preempt
any state law restricting the establishment of financial affiliations, primarily
related to insurance. The general effect of the law is to establish a
comprehensive framework to permit affiliations among commercial banks, insurance
6
companies, securities firms, and other financial service providers by revising
and expanding the bank holding company framework to permit a holding company
system to engage in a full range of financial activities through a new entity
known as a financial holding company.
The Company received approval to become a financial holding company during 2000.
Bank holding companies that elect to become a financial holding company may
affiliate with securities firms and insurance companies and engage in other
activities that are financial in nature or are incidental or complementary to
activities that are financial in nature.
"Financial in nature" activities include securities underwriting, dealing, and
market marking, sponsoring mutual funds and investment companies, insurance
underwriting and agency, merchant banking, and activities that the Federal
Reserve, in consultation with the Secretary of Treasury, determines from time to
time to be so closely related to banking or managing or controlling banks as to
be a proper incident thereto.
In December 2000, the Federal Reserve approved an interim rule defining the
three categories of activities financial in nature or incidental to a financial
activity:
o lending, exchanging, transferring, investing for others, or
safeguarding financial assets other than money or securities;
o providing any device or other instrumentality for transferring money or
other financial assets; or
o arranging, effecting or facilitating financial transactions for the
account of third parties.
The law also:
o broadens the activities that may be conducted by national banks,
banking subsidiaries of bank holding companies, and their financial
subsidiaries;
o provides an enhanced framework for protecting the privacy of consumer
information;
o adopts a number of provisions related to the capitalization,
membership, corporate governance, and other measures designed to
modernize the Federal Home Loan Bank system;
o modifies the laws governing the implementation of the Community
Reinvestment Act; and
o addresses a variety of other legal and regulatory issues affecting both
day-to-day operations and long-term activities of financial
institutions.
The Company does not believe that the Financial Services Modernization Act will
have a material adverse effect on its operations in the near-term. However, to
the extent that the legislation permits banks, securities firms, and insurance
companies to affiliate, the financial services industry may experience further
consolidation. The Financial Services Modernization Act is intended to grant to
community banks certain powers as a matter of right that larger institutions
have accumulated on an ad hoc basis. Nevertheless, this legislation may have the
result of increasing the amount of competition that the Company faces from
larger institutions and other types of companies with substantially greater
resources than the Company and offering a wider variety of financial products
than the Bank currently offers.
Privacy Rules. The Financial Services Modernization Act required federal banking
regulators to adopt rules that limit the ability of banks and other financial
institutions to disclose non-public information about
7
consumers to nonaffiliated third parties. Regulations were adopted in 2000 and
became effective November 13, 2000, although compliance was optional until July
1, 2001. Adopted regulations require disclosure of privacy policies to consumers
and, in some circumstances, allow consumers to prevent disclosure of personal
information. We have implemented procedures to comply with these rules and
believe that compliance has not had an adverse effect on operations.
Insurance products. In December 2000 pursuant to the requirements of the
Financial Services Modernization Act, the federal bank and thrift regulatory
agencies adopted consumer protection rules for the sale of insurance products by
depository institutions. The rule was effective on April 1, 2001. The final rule
applies to any depository institution or any person selling, soliciting,
advertising, or offering insurance products or annuities to a consumer at an
office of the institution or on behalf of the institution. The regulation
requires oral and written disclosure before the completion of the sale of an
insurance product that such product:
o is not a deposit or other obligation of, or guaranteed by, the
depository institution or its affiliate;
o is not insured by the FDIC or any other agency of the United States,
the depository institution or its affiliated; and
o has certain risks of investment, including the possible loss of value.
The depository institution may not condition as extension of credit on the
consumer's purchase of an insurance product or annuity from the depository
institution or from any of its affiliates, or on the consumer's agreement not to
obtain, or a prohibition on the consumer from obtaining, an insurance product or
annuity from an unaffiliated entity. Furthermore, to the extent practicable, a
depository institution must keep insurance and annuity sales activities
physically segregated from the areas where retail deposits are routinely
accepted from the general public. Finally, the rule addresses cross marketing
and referral fees.
Information Security. In January 2000, the banking agencies adopted guidelines
requiring financial institutions to establish an information security program
to:
o identify and assess the risks that may threaten customer information;
o develop a written plan containing policies and procedures to manage and
control these risks;
o implement and test the plan; and
o adjust the plan on a continuing basis to account for changes in
technology, the sensitivity of customer information and internal or
external threats to information security.
Each institution may implement a security program appropriate to its size and
complexity and the nature and scope of its operations. The guidelines were
effective July 1, 2001. The Company believes that it is in compliance with the
guidelines and that they will not adversely affect its operations.
USA Patriot Act of 2001
On October 26, 2001, President Bush signed the Uniting and Strengthening America
by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism
("USA Patriot Act") of 2001. Among other things, the USA Patriot Act (1)
prohibits banks from providing correspondent accounts directly to foreign shell
banks; (2) imposes due diligence requirements on banks opening or holding
accounts for foreign financial institutions or wealthy foreign individuals (3)
requires financial institutions to establish
8
an anti-money-laundering compliance program, and (4) eliminates civil liability
for persons who file suspicious activity reports. The Act also increases
governmental powers to investigate terrorism, including expanded government
access to account records. The Department of the Treasury is empowered to
administer and make rules to implement the Act. While we believe the USA Patriot
Act may, to some degree, affect our recordkeeping and reporting expenses, we do
not believe that the Act will have a material adverse effect on our business and
operations.
Transactions with Affiliates
The Company and the Bank are deemed affiliates within the meaning of
the Federal Reserve Act, and transactions between affiliates are subject to
certain restrictions. Accordingly, the Company and the Bank must comply with
Sections 23A and 23B of the Federal Reserve Act. Generally, Sections 23A and 23B
(1) limit the extent to which a financial institution or its subsidiaries may
engage in "covered transactions" with an affiliate, as defined, to an amount
equal to 10% of such institution's capital and surplus and an aggregate limit on
all such transactions with all affiliates to an amount equal to 20% of such
capital and surplus, and (2) require all transactions with an affiliate, whether
or not "covered transactions," to be on terms substantially the same, or at
least as favorable to the institution or subsidiary, as those provided to a
non-affiliate. The term "covered transaction" includes the making of loans,
purchase of assets, issuance of a guarantee and other similar types of
transactions.
Regulation of Management
Federal law (1) sets forth the circumstances under which officers or
directors of a financial institution may be removed by the institution's federal
supervisory agency; (2) places restraints on lending by an institution to its
executive officers, directors, principal stockholders, and their related
interests; and (3) prohibits management personnel from serving as a director or
in other management positions with another financial institution which has
assets exceeding a specified amount or which has an office within a specified
geographic area.
Tie-In Arrangements
The Company and the Bank cannot engage in certain tie-in arrangements
in connection with any extension of credit, sale or lease of property or
furnishing of services. For example, with certain exceptions, neither the
Company nor the Bank may condition an extension of credit to a customer on
either (1) a requirement that the customer obtain additional services provided
by it or (2) an agreement by the customer to refrain from obtaining other
services from a competitor.
The Federal Reserve has adopted amendments to its anti-tying rules
that: (1) removed Federal Reserve-imposed anti-tying restrictions on bank
holding companies and their non-bank subsidiaries; (2) allow banks greater
flexibility to package products with their affiliates; and (3) establish a safe
harbor from the tying restrictions for certain foreign transactions. These
amendments were designed to enhance competition in banking and nonbanking
products and to allow banks and their affiliates to provide more efficient,
lower cost services to their customers.
Source of Strength Requirements
Under Federal Reserve policy, the Company is expected to act as a
source of financial and managerial strength to the Bank. This means that the
Company is required to commit, as necessary, resources to support the Bank. Any
capital loans made by the Company to the Bank would be subordinate in priority
to deposits and to certain other indebtedness of the Bank.
9
State Law Restrictions
As a Washington business corporation, the Company may be subject to
certain limitations and restrictions as provided under applicable Washington
corporate law. In addition, Washington banking law restricts and governs certain
activities of the Bank.
The Bank
General
The Bank, as a non-Fed member FDIC insured institution, is subject to
regulation and examination by the FDIC and the State of Washington. The federal
laws that apply to the Bank regulate, among other things, the scope of its
business, its investments, its reserves against deposits, the timing of the
availability of deposited funds and the nature and amount of and collateral for
loans.
CRA. The Community Reinvestment Act (the "CRA") requires that, in
connection with examinations of financial institutions within their
jurisdiction, the FDIC evaluate the record of the financial institutions in
meeting the credit needs of their local communities, including low and moderate
income neighborhoods, consistent with the safe and sound operation of those
banks. These factors are also considered in evaluating mergers, acquisitions,
and applications to open a branch or facility. In connection with the FDIC's
assessment of the record of financial institutions under the CRA, it assigns a
rating of either, "outstanding," "satisfactory," "needs to improve," or
"substantial noncompliance" following an examination. The Bank received a CRA
rating of "outstanding" during its most recent examination.
Insider Credit Transactions. Banks are also subject to certain
restrictions imposed by the Federal Reserve Act on extensions of credit to
executive officers, directors, principal shareholders, or any related interests
of such persons. Extensions of credit (i) must be made on substantially the same
terms, including interest rates and collateral, and follow credit underwriting
procedures that are not less stringent than those prevailing at the time for
comparable transactions with persons not covered above and who are not
employees; and (ii) must not involve more than the normal risk of repayment or
present other unfavorable features. Banks are also subject to certain lending
limits and restrictions on overdrafts to such persons. A violation of these
restrictions may result in the assessment of substantial civil monetary
penalties on the affected bank or any officer, director, employee, agent, or
other person participating in the conduct of the affairs of that bank, the
imposition of a cease and desist order, and other regulatory sanctions.
FDICIA. Under the Federal Deposit Insurance Corporation Improvement Act
of 1991 ("FDICIA"), each federal banking agency has prescribed, by regulation,
noncapital safety and soundness standards for institutions under its authority.
These standards cover internal controls, information systems, and internal audit
systems, loan documentation, credit underwriting, interest rate exposure, asset
growth, compensation, fees and benefits, such other operational and managerial
standards as the agency determines to be appropriate, and standards for asset
quality, earnings and stock valuation. An institution which fails to meet these
standards must develop a plan acceptable to the agency, specifying the steps
that the institution will take to meet the standards. Failure to submit or
implement such a plan may subject the institution to regulatory sanctions.
Management believes that the Bank meets all such standards, and therefore, does
not believe that these regulatory standards will materially affect the Company's
business operations.
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Interstate Banking and Branching
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
(the "Interstate Act") permits nationwide interstate banking and branching under
certain circumstances. This legislation generally authorizes interstate
branching and relaxes federal law restrictions on interstate banking. Currently,
bank holding companies may purchase banks in any state, and states may not
prohibit such purchases. Additionally, banks are permitted to merge with banks
in other states as long as the home state of neither merging bank has "opted
out." The Interstate Act requires regulators to consult with community
organizations before permitting an interstate institution to close a branch in a
low-income area.
With regard to interstate bank mergers, Washington has "opted in" to
the Interstate Act and allows in-state banks to merge with out-of-state banks
subject to certain aging requirements. Washington law generally authorizes the
acquisition of an in-state bank by an out-of-state bank through merger with a
Washington financial institution that has been in existence for at least 5 years
prior to the acquisition. With regard to interstate bank branching, out-of-state
banks that do not already operate a branch in Washington may not establish de
novo branches in Washington or establish and operate a branch by acquiring a
branch in Washington. Under FDIC regulations, banks are prohibited from using
their interstate branches primarily for deposit production. The FDIC has
accordingly implemented a loan-to-deposit ratio screen to ensure compliance with
this prohibition.
Deposit Insurance
The deposits of the Bank are currently insured to a maximum of $100,000
per depositor through the Bank Insurance Fund ("BIF") administered by the FDIC.
All insured banks are required to pay semi-annual deposit insurance premium
assessments to the FDIC.
FDICIA included provisions to reform the Federal deposit insurance
system, including the implementation of risk-based deposit insurance premiums.
FDICIA also permits the FDIC to make special assessments on insured depository
institutions in amounts determined by the FDIC to be necessary to give it
adequate assessment income to repay amounts borrowed from the U.S. Treasury and
other sources, or for any other purpose the FDIC deems necessary. The FDIC has
implemented a risk-based insurance premium system under which banks are assessed
insurance premiums based on how much risk they present to the BIF. Banks with
higher levels of capital and a low degree of supervisory concern are assessed
lower premiums than banks with lower levels of capital or a higher degree of
supervisory concern. The FDIC has indicated that deposit premiums will likely
increase in the second half of 2002 or in 2003.
Dividends
The principal source of the Company's cash revenues is dividends
received from the Bank. The payment of dividends is subject to government
regulation, in that regulatory authorities may prohibit banks and bank holding
companies from paying dividends in a manner that would constitute an unsafe or
unsound banking practice. In addition, a bank may not pay cash dividends if that
payment could reduce the amount of its capital below that necessary to meet
minimum applicable regulatory capital requirements. Other than the laws and
regulations noted above, which apply to all banks and bank holding companies,
neither the Company nor the Bank are currently subject to any regulatory
restrictions on their dividends. Under applicable restrictions, as of December
31, 2001, the Bank could declare dividends totaling $3,852,000 without obtaining
prior regulatory approval.
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Capital Adequacy
Federal bank regulatory agencies use capital adequacy guidelines in the
examination and regulation of bank holding companies and banks. If capital falls
below minimum guideline levels, the holding company or bank may be denied
approval to acquire or establish additional banks or non-bank businesses or to
open new facilities.
The FDIC and Federal Reserve use risk-based capital guidelines for
banks and bank holding companies. These are designed to make such capital
requirements more sensitive to differences in risk profiles among banks and bank
holding companies, to account for off-balance sheet exposure and to minimize
disincentives for holding liquid assets. Assets and off-balance sheet items are
assigned to broad risk categories, each with appropriate weights. The resulting
capital ratios represent capital as a percentage of total risk-weighted assets
and off-balance sheet items. The guidelines are minimums, and the Federal
Reserve has noted that bank holding companies contemplating significant
expansion programs should not allow expansion to diminish their capital ratios
and should maintain ratios well in excess of the minimum. The current guidelines
require all bank holding companies and federally-regulated banks to maintain a
minimum risk-based total capital ratio equal to 8%, of which at least 4% must be
Tier I capital. Tier I capital for bank holding companies includes common
shareholders' equity, certain qualifying perpetual preferred stock and minority
interests in equity accounts of consolidated subsidiaries, less intangibles
except as described above and accumulated other comprehensive income (loss).
The Federal Reserve also employs a leverage ratio, which is Tier I
capital as a percentage of total assets less intangibles, to be used as a
supplement to risk-based guidelines. The principal objective of the leverage
ratio is to constrain the maximum degree to which a bank holding company may
leverage its equity capital base. The Federal Reserve requires a minimum
leverage ratio of 3%. However, for all but the most highly rated bank holding
companies and for bank holding companies seeking to expand, the Federal Reserve
expects an additional cushion of at least 1% to 2%.
FDICIA created a statutory framework of supervisory actions indexed to
the capital level of the individual institution. Under regulations adopted by
the FDIC, an institution is assigned to one of five capital categories depending
on its total risk-based capital ratio, Tier I risk-based capital ratio, and
leverage ratio, together with certain subjective factors. Institutions which are
deemed to be "undercapitalized" depending on the category to which they are
assigned are subject to certain mandatory supervisory corrective actions. The
Company does not believe that these regulations have any material effect on its
operations.
Effects of Government Monetary Policy
The earnings and growth of the Company are affected not only by general
economic conditions, but also by the fiscal and monetary policies of the federal
government, particularly the Federal Reserve. The Federal Reserve can and does
implement national monetary policy for such purposes as curbing inflation and
combating recession, but its open market operations in U.S. government
securities, control of the discount rate applicable to borrowings from the
Federal Reserve, and establishment of reserve requirements against certain
deposits, influence the growth of bank loans, investments and deposits, and also
affect interest rates charged on loans or paid on deposits. The nature and
impact of future changes in monetary policies and their impact on the Company
and the Bank cannot be predicted with certainty.
ITEM 2. Properties
The Company's administrative offices are located in Aberdeen, Washington. The
building located at 300 East Market Street is owned by the Bank and houses the
main branch and the administrative and
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operations offices of the Bank and the Company. The Bank completed construction
and occupied the building in December of 1979. There are nine branches in
addition to the main office owned by Pacific.
Pacific owns the building and land occupied by its Hoquiam, Ocean Shores,
Pacific Beach, and Montesano branches. Pacific also owns the land and building
located at 1007 South Pacific Highway, Long Beach, Washington, which houses the
Long Beach branch and the data processing operations of Pacific. Pacific owns
the land and buildings occupied by the Ocean Park, Ilwaco, Naselle, and
Cathlamet offices.
In addition to the land and buildings owned by Pacific, it also owns all of its
furniture, fixtures and equipment including data processing equipment. At
December 31, 2001, the net book value of the Company's premises and equipment
was $4 million.
ITEM 3. Legal Proceedings
The Company and the Bank from time to time are party to various legal
proceedings arising in the ordinary course of their business. Management
believes that there are no threatened or pending proceedings against the Company
or the Bank which, if determined adversely, would have a material effect on its
business or financial position.
ITEM 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders in the fourth quarter of
2001.
PART II
ITEM 5. Market for Registrant's Common Equity and Related Security Holders
Matters
No broker makes a market in the Company's common stock, and trading has not
otherwise been extensive. The trades that have occurred cannot be characterized
as amounting to an established public trading market. The Company's common stock
is traded by individuals on a personal basis and is not listed on any exchange
or traded on the over-the-counter market, and the prices reported reflect only
the transactions known to Company management. Because only limited information
is available, the following data may not accurately reflect the actual market
value of the Company's common stock. The following data includes trades between
individual investors, as reported to the Company as its own transfer agent.
2001 2000
Shares Traded High Low Shares Traded High Low
First Quarter 5,012 $ 25 $ 23 4,915 $ 29 $ 26
Second Quarter 12,341 $ 25 $ 21 12,040 $ 28 $ 25
Third Quarter 27,166 $ 24 $ 21 7,575 $ 26 $ 24
Fourth Quarter 7,691 $ 25 $ 23 8,359 $ 24 $ 21
As of December 31, 2001, there were approximately 957 stockholders of record of
the Company's common stock.
13
The Company's Board of Directors declared dividends on its common stock in
December 2001 and 2000 in the amounts per share of $1.32 and $1.28,
respectively. The Board of Directors has adopted a dividend policy which is
reviewed annually.
Payment of dividends is subject to regulatory limitations. Under federal banking
law, the payment of dividends by the Company and the Bank is subject to capital
adequacy requirements established by the Federal Reserve and the FDIC. Under
Washington general corporate law as it applies to the Company, no cash dividend
may be declared or paid if, after giving effect to the dividend, the Company is
insolvent or its liabilities exceed its assets. Payment of dividends on the
Common Stock is also affected by statutory limitations, which restrict the
ability of the Bank to pay upstream dividends to the Company. Under Washington
banking law as it applies to the Bank, no dividend may be declared or paid in an
amount greater than net profits then available, and after a portion of such net
profits have been added to the surplus funds of the Bank.
ITEM 6. Selected Financial Data
The following table sets forth certain selected consolidated financial data of
the Company at and for the years ended December 31:
2001 2000 1999 1998 1997
-----------------------------------------------------------------------
($ in thousands, except per share data)
Operations Data
Net interest income $ 11,572 $ 11,675 $ 11,430 $ 11,100 $ 10,692
Provision for credit losses 580 635 60 110 142
Noninterest income 1,529 1,217 1,255 1,281 1,149
Noninterest expense 7,193 7,530 7,011 6,687 6,188
Provision for income taxes 1,521 1,424 1,692 1,590 1,643
Net income 3,807 3,303 3,922 3,994 3,868
Net income per share:
Basic 1.53 1.33 1.60(1) 1.64(1) 1.59(1)
Diluted 1.52 1.31 1.59 1.61 1.58
(1) Restated to reflect the 5 for 1 stock split effected in July 2000.
Dividends declared 3,289 3,204 3,105 2,379 2,118
Dividends paid ratio 86% 97% 79% 60% 55%
Performance Ratios
Net interest margin 5.05% 5.04% 5.10% 5.37% 5.90%
Efficiency ratio 54.90% 58.41% 55.27% 54.01% 52.26%
Return on average assets 1.55% 1.34% 1.64% 1.80% 1.99%
Return on average equity 15.57% 14.95% 17.26% 18.57% 19.70%
Balance Sheet Data
Total assets 243,617 253,313 242,189 236,364 208,551
Loans, net 174,495 175,142 150,734 145,416 141,780
Total deposits 214,644 213,511 206,139 210,650 178,726
Short-term borrowings -0- 11,358 9,675 86 6,625
Shareholders' equity 23,514 22,743 21,438 21,485 19,657
Book value per share 9.44 9.09 8.63(1) 8.79(1) 8.07(1)
Equity to assets ratio 9.65% 8.98% 8.85% 9.09% 9.43%
(1) Restated to reflect the 5 for 1 stock split effected in July 2000.
14
Asset Quality Ratios
Nonperforming loans to total loans .71% 1.93% 0.21% 0.01% 0.29%
Allowance for loan losses
to total loans 1.19% 1.14% 1.26% 1.27% 1.35%
Allowance for loan losses
to nonperforming loans 168.18% 59.24% 612.69% 12426.67% 459.00%
Nonperforming assets to
total assets .51% 1.35% 0.13% 0.06% 0.22%
ITEM 7. Management's discussion and analysis of financial condition and results
of operations
RESULTS OF OPERATIONS
Years ended December 31, 2001, 2000, and 1999
General. The Company's net income for 2001 was $3,807,000, a 15.3% increase
compared to $3,303,000 in 2000, and a decrease of 2.9% from $3,922,000 in 1999.
Basic earnings per share were $1.53, $1.33, and $1.60 for 2001, 2000, and 1999,
respectively. Return on average assets was 1.55%, 1.34%, and 1.64%, in 2001,
2000, and 1999 respectively. Return on average equity was 15.57%, 14.95%, and
17.26%, respectively, in 2001, 2000, and 1999.
The following table presents condensed consolidated statements of income for the
Company for each of the years in the three-year period ended December 31, 2001.
Increase Increase
(Decrease) (Decrease)
(Dollars in thousands) 2001 Amount % 2000 Amount % 1999
- ---------------------------------------------------------------------------------------------------------------------------
Interest income $ 18,102 $(2,170) (10.7) $20,272 $1,918 10.4 $18,354
Interest expense 6,530 (2,067) (24.0) 8,597 1,673 24.2 6,924
Net interest income 11,572 (103) (.9) 11,675 245 2.1 11,430
Provision for credit losses 580 (55) (8.7) 635 575 958.3 60
Net interest income after
provision for credit losses 10,992 (48) (.4) 11,040 (330) (2.9) 11,370
Other operating income 1,529 312 25.6 1,217 (38) (3.0) 1,255
Other operating expense 7,193 (337) (4.5) 7,530 519 7.4 7,011
Income before income taxes 5,328 601 12.7 4,727 (887) (15.8) 5,614
Income taxes 1,521 97 6.8 1,424 (268) (15.8) 1,692
Net income 3,807 504 15.3 3,303 (619) (15.8) 3,922
Net Interest Income. The Company derives the majority of its earnings from net
interest income, which is the difference between interest income earned on
interest earning assets and interest expense incurred on interest bearing
liabilities. The following table sets forth information with regard to average
balances of the interest earning assets and interest bearing liabilities and the
resultant yields or cost, net interest income, and the net interest margin.
15
Year Ended December 31,
2001 2000 1999
---- ---- ----
Interest Interest Interest
Average Income Avg Average Income Avg Average Income Avg
Balance (Expense) Rate Balance (Expense) Rate Balance (Expense) Rate
Assets (dollars in thousands) ------- --------- ---- ------- --------- ---- ------- --------- ----
Earning assets:
Loans $ 170,628 $ 15,032* 8.81% $165,834 $ 16,500* 9.95% $147,689 $ 14,129* 9.57%
Investment Securities:
Taxable 27,360 1,638 5.99% 45,857 2,812 6.13% 51,439 2,767 5.81%
Tax-Exempt 15,042 1,225* 8.14% 13,187 1,007* 7.64% 14,333 1,114* 7.77%
Total Investment
securities 42,402 2,863 6.75% 59,044 3,819 6.47% 65,772 3,881 6.24%
Federal funds sold and
deposits in banks 11,339 410 3.61% 2,258 148 6.55% 10,476 570 5.44%
Total earning assets/interest
income $ 224,369 $ 18,305 8.16% $227,136 $ 20,467 9.01% $223,937 $ 18,580 8.40%
Cash and due from banks 8,448 8,784 8,599
Bank premises and equipment
(net) 4,104 3,728 3,596
Other assets 10,479 8,897 5,303
Allowance for credit losses (1,912) (1,997) (1,922)
Total assets $ 245,488 $246,548 $239,513
Liabilities and Shareholders' Equity
Interest bearing liabilities:
Deposits:
Savings and interest-
bearing demand $105,846 $ (2,395) 2.26% $109,266 $ (4,483) 4.10% $112,452 $ (3,435) 3.05%
Time 75,819 (3,945) 5.20% 68,516 (3,537) 5.16% 65,524 (3,277) 5.00%
Total deposits 181,665 (6,340) 3.49% 177,782 (8,020) 4.51% 177,976 (6,712) 3.77%
Other borrowings 3,065 (190) 6.20% 8,876 (577) 6.50% 4,091 (212) 5.18%
Total interest-bearing liabilities/
Interest expense $184,730 $ (6,530) 3.53% $186,658 $ (8,597) 4.61% $182,067 $ (6,924) 3.80%
Demand deposits 33,419 34,343 32,921
Other liabilities 2,888 3,457 1,804
Shareholders' equity 24,451 22,090 22,721
Total liabilities and shareholders'
equity $245,488 $246,548 $239,513
Net interest income $ 11,775* $ 11,870* $ 11,656*
Net interest income as a percentage of
average earning assets
Interest income 8.16% 9.01% 8.40%
Interest expense 2.91% 3.78% 3.10%
Net interest income 5.25% 5.23% 5.30%
* Tax equivalent basis - 34% tax rate used
Nonaccrual loans are included in "loans."
Interest income on loans include loan fees of $708,270, $822,516 and $731,508,
respectively.
Net interest income decreased .9% to $11,572,000 in 2001 compared to 2000. The
decrease is primarily the result of a decreased interest rate environment. The
Company's interest income decreased 10.7% to $18,102,000 in 2001 from
$20,272,000 in 2000. This decrease, also due to decreasing interest rates, was
substantially offset by a 24% decrease in interest expense from $8,597,000 in
2000 to $6,530,000 in 2001. Net interest margins were 5.16%, 5.14%, and 5.10%
for the years ended December 31, 2001, 2000, and 1999, respectively.
16
The following table presents changes in net interest income attributable to
changes in volume or rate. Changes not solely due to volume or rate are
allocated to volume and rate based on the absolute values of each.
2001 compared to 2000 2000 compared to 1999
Increase (decrease) due to Increase (decrease) due to
(dollars in thousands) Volume Rate Net Volume Rate Net
------ ---- --- ------ ---- ---
Interest earned on:
Loans $466 $(1,934) $(1,468) $1,788 $583 $2,371
Securities:
Taxable (1,109) (65) (1,174) (336) 161 (175)
Tax-exempt 148 70 218 (88) (19) (107)
Total securities (961) 5 (956) (424) 142 (282)
Fed funds sold and
interest bearing deposits
in other banks 354 (93) 261 (520) 98 (422)
Total interest earning assets (141) (2,022) (2,163) 844 823 1,667
Interest paid on:
Savings and interest bearing
demand deposits (136) (1,952) (2,088) (100) 1,148 1,048
Time deposits 380 28 408 152 108 260
Short term borrowings (362) (25) (387) 300 65 365
Total interest bearing liabilities (118) (1,949) (2,067) 352 1,321 1,673
Change in net interest income (23) (73) (96) 492 (498) (6)
Non-Interest Income. Non-interest income was $1,529,000 for 2001, an increase of
$312,000 or 25.6% from 2000 when it totaled $1,217,000. The 2000 amount was a
decrease of $38,000 or 3.0% compared to the 1999 total of $1,255,000.
In 2001, service charges on deposit accounts increased $151,000 or 22.3% to a
total of $828,000 compared to $677,000 in 2000. The 2000 total was down $68,000
or 9.1% compared to the 1999 total of $745,000. During 2001, a new customer
overdraft protection program was implemented which contributed to the increase
in service charges on deposit accounts.
Income from sources other than service charges on deposit accounts and gains on
sale of securities available for sale totaled $669,000 in 2001, an increase of
$138,000 from 2000, or 26%. The primary reason for the increase was income from
foreclosed real estate, which totaled $139,000. During 2001, the Bank was
collecting operating revenues from a motel which was brought into foreclosed
real estate in July 2001. Other major components of non-interest income were
credit card income and bank owned life insurance income. Income from other
sources for 2000 was $531,000, an increase of $66,000 or 14.2% compared to 1999
primarily due to the gain on the sale of foreclosed real estate.
The following table represents the principal categories of non-interest income
for each of the years in the three-year period ended December 31, 2001.
17
Increase Increase
(Decrease) (Decrease)
(Dollars in thousands) 2001 Amount % 2000 Amount % 1999
- ---------------------------------------------------------------------------------------------------------------------
Service charges on
deposit accounts $ 828 $151 22.3% $677 $(68) (9.1%) $745
Mortgage broker fees 32 23 255.0% 9 (27) (75.0%) 36
Net gain on sale of securities --- --- --- --- --- --- 9
Other operating income 669 138 26.0% 531 66 14.2% 465
Total non-interest income $ 1,529 312 25.6% 1,217 (38) (3.0%) 1,255
Non-Interest Expense. Total non-interest expense was $7,193,000, a decrease of
$337,000 or 4.5% compared to $7,530,000 in 2000. In 2000 non-interest expense
increased $519,000 or 7.4% compared to $7,011,000 in 1999.
Salary and employee benefits decreased by $77,000, or 1.9%, in 2001 to
$4,058,000 and increased by $264,000, or 6.8%, in 2000. The primary reason for
the decrease in 2001 was the retirement of the Company's Chief Executive
Officer, Robert Worrell. The increase in 2000 was primarily due to funding a
defined benefit retirement plan which was terminated on December 31, 2000.
Occupancy and equipment expense decreased $176,000 or 15.5% in 2001 and
increased $126,000 or 12.5% in 2000. The decrease in 2001 was due to a decline
in equipment maintenance expense and reduced equipment depreciation expense. The
2000 increase was the result of writing down data processing equipment no longer
in service.
Other expense decreased $84,000 or 3.7% in 2001 compared to an increase of
$129,000 or 6.0% in 2000 over 1999. The decrease in 2001 is related primarily to
lower advertising expense of $20,000, non-recurring deferred director fees of
$160,000 paid in 2000, decreased insurance expense of $26,000 and an increase in
foreclosed real estate expenses of $127,000 primarily due to the operations of
the motel. Non-recurring expenses totaled approximately $117,000 during 2000 and
is the reason for the increase compared to 1999.
The following table represents the principal categories of non-interest expense
for each of the years in the three-year period ended December 31, 2001.
Increase Increase
(Decrease) (Decrease)
(Dollars in thousands) 2001 Amount % 2000 Amount % 1999
- -----------------------------------------------------------------------------------------------------------------------
Salaries and employee benefits $ 4,058 $ (77) (1.9)% $4,135 $ 264 6.8% $3,871
Occupancy and equipment 963 (176) (15.5)% 1,139 126 12.5% 1,013
Other expense 2,172 (84) (3.7)% 2,256 129 6.0% 2,127
Total non-interest expense $ 7,193 $ (337) (4.5)% $7,530 $ 519 7.4% $7,011
ASSET AND LIABILITY MANAGEMENT
The largest component of the Company's earnings is net interest income. Interest
income and interest expense are affected by general economic conditions,
competition in the market place, market interest rates and repricing and
maturity characteristics of the Company's assets and liabilities. Exposure to
interest rate risk is primarily a function of differences between the maturity
and repricing schedules of assets (principally loans and investment securities)
and liabilities (principally deposits). Assets and
18
liabilities are described as interest sensitive for a given period of time when
they mature or can reprice within that period. The difference between the amount
of interest sensitive assets and interest sensitive liabilities is referred to
as the interest sensitive "GAP" for any given period. The "GAP" may be either
positive or negative. If positive, more assets reprice than liabilities. If
negative, the reverse is true.
Certain shortcomings are inherent in the interest sensitivity "GAP" method of
analysis. Complexities such as prepayment risk and customer responses to
interest rate changes are not taken into account in the "GAP" analysis.
Accordingly, management also utilizes a net interest income simulation model to
measure interest rate sensitivity. Simulation modeling gives a broader view of
net interest income variability, by providing various rate shock exposure
estimates. Management regularly reviews the interest rate risk position and
provides measurement reports to the Board of Directors.
The following table shows the dollar amount of interest sensitive assets and
interest sensitive liabilities at December 31, 2001 and differences between them
for the maturity or repricing periods indicated.
Due after
Due in one one through Due after
(dollars in thousands) year or less five years five years Total
- ----------------------------------------------------------------------------------------------------------------
Interest earning assets
Loans $ 88,042 $ 34,490 $ 54,072 $ 176,604
Investment securities 12,820 14,358 9,440 36,618
Fed Funds and interest
bearing balances with banks 4,973 -0- -0- 4,973
Federal Home Loan Bank Stock -0- -0- 3,813 3,813
Total interest earning assets $ 105,835 $ 48,848 $ 67,325 $ 222,008
Interest bearing liabilities
Interest bearing demand deposits $ 27,120 $ -0- $ -0- $ 27,120
Savings deposits 77,608 -0- -0- 77,608
Time deposits 59,037 12,442 -0- 71,479
Short term borrowings -0- -0- -0- -0-
Total interest bearing liabilities $ 163,765 $ 12,442 $ -0- $ 176,207
Net interest rate sensitivity GAP $ (57,930) $ 36,406 $ 67,325 $ 45,801
The following table shows the dollar amount of interest sensitive assets and
interest sensitive liabilities at December 31, 2000 and difference between them
for the maturity or repricing periods indicated.
Due after
Due in one one through Due after
(dollars in thousands) year or less five years five years Total
- --------------------------------------------------------------------------------------------------------------
Interest earning assets
Loans $ 97,464 $ 27,174 $ 52,530 $ 177,168
Investment securities 15,506 26,871 12,695 55,072
Fed Funds and interest
bearing balances with banks 1,050 -0- -0- 1,050
Federal Home Loan Bank Stock -0- -0- 3,562 3,562
Total interest earning assets $ 114,020 $ 54,045 $ 68,787 $ 236,852
19
Interest bearing liabilities
Interest bearing demand deposits $ 24,125 $ -0- $ -0- $ 24,125
Savings deposits 76,018 -0- -0- 76,018
Time deposits 75,349 5,509 -0- 80,858
Short term borrowings 11,358 -0- -0- 11,358
Total interest bearing liabilities $ 186,850 $ 5,509 $ -0- $192,359
Net interest rate sensitivity GAP $ (72,830) $48,536 $ 68,787 $ 44,493
Effects of Changing Prices. The results of operations and financial conditions
presented in this report are based on historical cost information, and are
unadjusted for the effects of inflation. Since the assets and liabilities of
financial institutions are primarily monetary in nature, the performance of the
Company is affected more by changes in interest rates than by inflation.
Interest rates generally increase as the rate of inflation increases, but the
magnitude of the change in rates may not be the same.
The effects of inflation on financial institutions is normally not as
significant as its influence on businesses which have investments in plants and
inventories. During periods of high inflation there are normally corresponding
increases in the money supply, and financial institutions will normally
experience above-average growth in assets, loans and deposits. Inflation does
increase the price of goods and services, and therefore operating expenses
increase during inflationary periods.
INVESTMENT PORTFOLIO
The Company's investment securities portfolio decreased $18,454,000, or 33.5%
during 2001 to $36,618,000 at year end from $55,072,000 in 2000, which was a
$2,828,000 decrease over 1999. The changes in 2001 were primarily in U.S.
Government agency securities due to call options being exercised by the issuers.
Proceeds from the portfolio decrease were used to decrease short term borrowings
during 2001.
The carrying values of investment securities at December 31 in each of the last
three years are as follows:
(dollars in thousands) 2001 2000 1999
- --------------------------------------------------------------------------------------------------------
Treasury securities $ -0- $ 500 $ 997
U.S. Agencies securities 6,872 27,613 27,655
Obligations of states and political subdivisions 16,658 13,554 14,291
Other securities 13,088 13,405 14,957
Total $ 36,618 $ 55,072 $ 57,900
The following table presents the maturities of investment securities at December
31, 2001. Taxable equivalent values are used in calculating yields assuming a
tax rate of 34%.
20
Due after Due after
Due in one one through five through Due after
(dollars in thousands) year or less five years ten years ten years Total
- -------------------------------------------------------------------------------------------------------------------------
U.S. Agency securities $ 505 $ 2,775 $ 29 $ 3,563 $ 6,872
Weighted average yield 5.33% 6.26% 9.00% 5.62%
Obligations of states and political
subdivisions 1,505 6,712 3,568 4,873 16,658
Weighted average yield 6.72% 6.46% 6.61% 9.74%
Other securities 6,996 6,092 -0- -0- 13,088
Weighted average yield 5.02% 5.61% -0- -0-
Total $ 12,721 $ 15,174 $ 3,519 $ 8,399 $ 36,618
LENDING
General. The Company's policy is to originate loans primarily in its local
markets. Depending on the purpose of the loan, the loans may be secured by a
variety of collateral, including business assets, real estate, and personal
assets.
The following table sets forth the composition of the Company's loan portfolio
at December 31 in each of the past five years.
(dollars in thousands) 2001 2000 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
Commercial $ 72,427 $ 68,827 $ 56,198 $ 48,455 $ 44,815
Real Estate Construction 6,554 6,118 3,325 4,929 4,258
Real Estate Mortgage 91,714 96,334 88,905 90,027 90,631
Installment 4,941 4,612 3,379 3,104 3,276
Credit cards and overdrafts 968 1,277 857 764 747
Total $176,604 $ 177,168 $ 152,664 $ 147,280 $ 143,727
Loan Maturities and Sensitivity in Interest Rates. The following table presents
information related to maturity distribution and interest rate sensitivity of
commercial and real estate construction loans outstanding, based on scheduled
repayments at December 31, 2001.
Due after
Due in one one through Due after
(dollars in thousands) year or less five years five years Total
- ------------------------------------------------------------------------------------------------------------------------
Commercial $ 47,517 $ 1,960 $ 22,950 $ 72,427
Real estate construction 4,265 108 2,181 6,554
Total $ 52,621 $ 2,068 $ 25,131 $ 78,981
Total loans maturing after one year with
Predetermined interest rates (fixed) $ 22,903 $ 53,723 $ 76,626
Floating or adjustable rates (variable) 10,868 -0- 10,868
Total $ 33,771 $ 53,723 $ 87,494
21
At December 31, 2001, 49.8% of the loan portfolio presented above was due in one
year or less.
Risk Elements. Risk elements include accruing loans past due ninety days or
more, non-accrual loans, and loans which have been restructured to provide
reduction or deferral of interest or principal for reasons related to the
debtor's financial difficulties. The Company's policy for placing loans on
non-accrual status is based upon management's evaluation of the ability of the
borrower to meet both principal and interest payments as they become due.
Generally, loans with interest or principal payments which are ninety or more
days past due are placed on non-accrual, unless they are well-secured and in the
process of collection, and the interest accrual is reversed against income.
The following table presents information related to the Company's non-accrual
loans and other non-performing assets at December 31 in each of the last five
years.
(dollars in thousands) 2001 2000 1999 1998 1997
- ----------------------------------------------------------------------------------------------------
Non-accrual loans $ 1,254 $ 3,128 $ 175 $ 15 $ 422
Accruing loans past due
90 days or more 79 292 140 4 184
Restructured loans -0- -0- -0- -0- -0-
Non-accrual loans decreased approximately $1.9 million in 2001 from 2000
primarily due to foreclosure involving several properties. During 2001, the
Company foreclosed on properties totaling $1,733,000. The total is net of charge
offs based on management's estimate of fair market value or the result of
appraisals. The properties consist of an agricultural property and commercial
real estate. During 2001, sales of other real estate owned totaled $674,000 net
of expenses. At December 31, 2001, the balance remaining in other real estate
owned totaled $1,040,000. Non-accrual loans increased $2,953,000 to $3,128,000
at year-end 2000 after increasing to $175,000 in 1999, and decreasing to $15,000
in 1998 from $422,000 in 1997. The increase in non-accrual loans experienced in
2000 was attributable to the decline in the regional and national economies and
the local agriculture economy. Interest income on non-accrual loans that would
have been recorded had those loans performed in accordance with their initial
terms, as of December 31, was $75,000 for 2001, $168,000 for 2000, $10,000 for
1999, $20,000 for 1998 and $45,000 for 1997. Interest income recognized on
impaired loans for 2001 was $2,000, for 2000 was $31,000, for 1999 was $11,000,
and was none for 1998 and 1997.
There are $79,000 of loans which are ninety days or more past due and still
accruing at year-end 2001. It is management's opinion that the loans are
adequately collateralized and if foreclosure and sale of collateral is
necessary, no loss will be incurred.
Loan Concentrations. The Company has credit risk exposure related to real estate
loans. The Company makes real estate loans for construction and loans for other
purposes, which are secured by real estate. At December 31, 2001 loans secured
by real estate totaled $98,268,000, which represents 55.6% of the total loan
portfolio. Real estate construction loans comprised $6,554,000 of that amount,
while real estate loans secured by residential properties totaled $33,129,000.
As a result of these concentrations of loans the loan portfolio is susceptible
to changes in economic and market conditions in the Company's market areas. The
Company generally requires collateral on all real estate exposures and typically
maintains loan-to-value ratios of no greater than 80%.
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. Loans deemed uncollectible are charged against and reduce the allowance.
Periodically, a provision for loan losses is charged to current expense.
22
This provision acts to replenish the allowance for loan losses and to maintain
the allowance at a level that management deems adequate.
There is no precise method of predicting specific loan losses or amounts that
ultimately may be charged off on segments of the loan portfolio. The
determination that a loan may become uncollectible, in whole or in part, is a
matter of judgment. Similarly, the adequacy of the allowance for loan losses can
be determined only on a judgmental basis, after full review, including (a)
consideration of economic conditions and the effect on particular industries and
specific borrowers; (b) a review of borrowers' financial data, together with
industry data, the competitive situation, the borrowers' management capabilities
and other factors; (c) a continuing evaluation of the loan portfolio, including
monitoring by lending officers and staff credit personnel of all loans which are
identified as being of less than acceptable quality; (d) an in-depth appraisal,
on a monthly basis, of all loans judged to present a possibility of loss (if, as
a result of such monthly appraisals, the loan is judged to be not fully
collectible, the carrying value of the loan is reduced to that portion
considered collectible); and (e) an evaluation of the underlying collateral for
secured lending, including the use of independent appraisals of real estate
properties securing loans. A formal analysis of the adequacy of the allowance is
conducted monthly and is reviewed by the Board of Directors. Based on this
analysis, management considers the allowance for credit losses to be adequate.
Periodic provisions for loan losses are made to maintain the allowance for
credit losses at an appropriate level. The provisions are 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.
Transactions in the allowance for credit losses for the five years ended
December 31, 2001 are as follows:
(dollars in thousands) 2001 2000 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
Balance at beginning of year $ 2,026 $ 1,930 $ 1,864 $ 1,937 $ 1,824
Charge-offs:
Commercial 170 554 114 9 5
Real estate loans 366 0 0 194 0
Credit card 13 6 13 18 20
Installment 15 8 7 0 16
Total charge-offs $ 564 $ 568 $ 134 $ 221 $ 41
Recoveries:
Commercial $ 54 $ 15 $ 23 $ 34 $ 7
Real estate loans 0 12 110 0 0
Credit card 0 0 6 3 2
Installment 13 2 1 1 3
Total recoveries $ 67 $ 29 $ 140 $ 38 $ 12
Net charge-offs (recoveries) 497 539 (6) 183 29
Provision for credit losses 580 635 60 110 142
Balance at end of year $ 2,109 $ 2,026 $ 1,930 $ 1,864 $ 1,937
Ratio of net charge-offs (recoveries)
To average loans outstanding .29% .33% --- .13% .02%
23
The allowance for credit losses was $2,109,000 at year-end 2001, compared with
$2,026,000 at year-end 2000. The aggregate increase resulted from the provision
of $580,000 and charge-offs in 2001. The allowance for credit losses as a
percentage of total loans outstanding at year-end 2001 was 1.19%, which in
management's opinion is adequate and reasonable in comparison to the Company's
credit risk experience.
The allowance for credit losses during 2000 increased $96,000 compared to
year-end 1999. The total allowance for credit losses was $2,026,000 at year-end
2000 and $1,930,000 in 1999. The aggregate increase during 2000 was the result
of the provision of $635,000 and net charge-offs. The allowance increased in
1999 from the provision of $60,000 and recoveries of $6,000. The allowance for
credit losses as a percentage of total loans outstanding was 1.14% at year-end
2000, 1.26% at year-end 1999 and 1.27% in 1998. The allowance for credit losses
at year-end 1997 was $1,937,000. The net charge-offs were $29,000 in 1997 and
provisions for credit losses were $142,000 in 1997. The allowance for credit
losses as a percentage of total loans outstanding at year-end 1997 was 1.35%.
Charge-offs during 2001 totaled $564,000, which was due primarily to an
additional write down of $120,000 for an agriculture cranberry farm loan, which
was originally written down by $524,000 in 2000. In addition, during 2001 a
fishing vessel loan was charged-off in the amount of $21,000, while commercial
real estate loans were charged off consisting of a commercial building in the
amount of $97,000 and a medical office building in the amount of $222,000. These
charge-offs were the primary reason for the increased loan loss provisions
during 2001 and 2000. Subsequent to year end 2001, management performed
additional analysis and obtained appraisals for several credits due to the
current economic condition in its market areas and identified weakness in the
borrower's financial condition. Based on these events, further charge-offs are
likely during the 2002 fiscal year, and accordingly, a significant addition to
the loan loss reserve during the first quarter of 2002 is likely.
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:
(dollars in thousands) 2001 2000 1999 1998 1997
- -----------------------------------------------------------------------------------------------------
Total Impaired Loans $ 1,662 $ 3,218 $ 175 $ 15 $ 422
Total Impaired Loans with Valuation Allowance 1,180 1,114 --- --- 138
Valuation Allowance related to Impaired Loans 143 412 --- --- 8
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.
24
The following table presents the allocation of the allowance for credit losses
among the major loan categories based primarily on their historical net charge
off experience and other business considerations at December 31 in each of the
last five years.
% of % of % of % of % of
2001 Total 2000 Total 1999 Total 1998 Total 1997 Total
(Dollars in thousands) Reserve Reserve Reserve Reserve Reserve Reserve Reserve Reserve Reserve Reserve
- ---------------------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Commercial loans $ 548 26% $ 689 34% $ 720 37% $ 710 38% $ 798 41%
Real estate loans 1,413 67% 1,256 62% 1,153 60% 1,091 58% 1,089 56%
Consumer loans 148 7% 81 4% 58 3% 63 4% 50 3%
Total allowance $ 2,109 100% $ 2,026 100% $1,930 100% $1,864 100% $1,937 100%
Ratio of allowance for credit
losses to loans outstanding
at end of year 1.19% 1.14% 1.26% 1.27% 1.35%
The table indicates a decrease of $141,000 from December 31, 2000 to December
31, 2001 in the allowance related to commercial loans, which was offset by
growth of $157,000 during the same period in the allowance for loan losses for
real estate loans. This growth is due to an increase in past due balances of
these loans.
DEPOSITS
The Company's primary source of funds has historically been customer deposits. A
variety of deposit products are offered to attract customer deposits. The
products include non-interest bearing demand accounts, negotiable order of
withdrawal (NOW) accounts, savings accounts, and time deposits. Interest-bearing
accounts earn interest at rates established by management, based on competitive
market factors and the need to increase or decrease certain types of maturities
of deposits. The Company has succeeded in growing its deposit base over the last
three years despite increasing competition for deposits in our markets. The
Company believes that it has benefited from its local identity and superior
customer service. Attracting deposits remains integral to the Company's business
as it is the primary source of funds for loans and a major decline in deposits
or failure to attract deposits in the future could have an adverse effect on
operations.
The following table sets forth the average balances for each major category of
deposits and the weighted average interest rate paid for deposits for the
periods indicated.
(dollars in thousands) 2001 RATE 2000 RATE 1999 RATE
- -----------------------------------------------------------------------------------------------------------------------
Demand deposits $ 33,419 0.00% $ 34,343 0.00% $ 32,921 0.00%
Interest bearing demand deposits 26,949 2.09% 26,416 2.51% 31,980 2.51%
Savings deposits 78,897 2.32% 82,850 3.65% 80,472 3.67%
Time deposits 75,819 5.20% 68,516 5.16% 65,524 5.00%
Total $ 215,084 3.49% $212,125 3.78% $210,897 3.18%
25
Maturities of time certificates of deposit as of December 31, 2001 are
summarized as follows:
Under Over
(dollars in thousands) $100,000 $100,000 Total
-------- -------- -----
3 months or less $ 14,453 $ 7,596 $ 22,049
Over 3 through 6 months 12,386 6,478 18,864
Over 6 through 12 months 10,297 7,192 17,489
Over 12 months 7,890 5,187 13,077
Total 45,026 6,453 71,479
SHORT-TERM BORROWINGS
The following is information regarding the Company's short-term borrowings for
the years ended December 31, 2001, 2000 and 1999.
(dollars in thousands) 2001 2000 1999
- -----------------------------------------------------------------------------------------------------------------------
Amount outstanding at end of period $ 0 $11,358 $ 9,675
Weighted average interest rate thereon 0% 6.39% 5.18%
Maximum amount outstanding at any month end during period $7,580 $11,358 $11,375
Average amounts outstanding during the period 963 9,036 4,091
Weighted average interest rate during period 5.68% 6.39% 5.18%
KEY FINANCIAL RATIOS
Year ended December 31, 2001 2000 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
Return on average assets 1.55% 1.34% 1.64% 1.80% 1.99%
Return on average equity 15.57% 14.95% 17.26% 18.57% 19.70%
Average equity to average assets ratio 9.96% 8.96% 9.49% 9.69% 10.09%
Dividend payout ratio 87% 97% 79% 60% 55%
LIQUIDITY AND CAPITAL RESOURCES
Liquidity. The primary concern of depositors, creditors and regulators is the
Company's ability to have sufficient funds readily available to repay
liabilities as they mature. In order to ensure adequate funds are available at
all times, the Company monitors and projects the amount of funds required on a
daily basis. Through the Bank, the Company obtains funds from its customer base,
which provides a stable source of "core" demand and consumer deposits.
Other sources are available with borrowings from the Federal Home Loan Bank and
correspondent banks. Liquidity requirements can also be met through disposition
of short-term assets. In management's opinion, the Company maintains an adequate
level of liquid assets, consisting of cash and due from banks, interest bearing
deposits with banks, and federal funds sold to support the daily cash flow
requirements.
Management expects to continue to rely on customer deposits as the primary
source of liquidity, but may also obtain liquidity from maturity of its
investment securities, sale of securities currently available for sale, net
income, and other borrowings. Although deposit balances have shown historical
growth, deposit habits of customers may be influenced by changes in the
financial services industry, interest rates available on other investments,
general economic conditions, consumer confidence, and competition. Borrowings
may be used on a short-term basis to compensate for reductions in deposits, but
are generally
26
not considered a long term solution to liquidity issues. Therefore, reductions
in deposits could adversely affect the Company's results of operations.
Capital. The Company endeavors to maintain equity capital at an adequate level
to support and promote investor confidence. The Company conducts its business
through the Bank. Thus, the Company needs to be able to provide capital and
financing to the Bank should the need arise. The primary sources for obtaining
capital are additional stock sales and retained earnings. Total shareholder
equity averaged $24,451,000 in 2001, compared to $22,090,000 in 2000, an
increase of 10.7%, and $22,721,000 in 1999, a decrease of 2.8% compared to 1999.
The Company's Board of Directors considers financial results, growth plans, and
anticipated capital needs in formulating its dividend policy. The payment of
dividends is subject to adequate financial results of the Bank, and limitations
imposed by law and governmental regulations.
The Federal Reserve has established guidelines that mandate risk-based capital
requirements for bank holding companies. Under the guidelines, one of four risk
weights is applied to balance sheet assets, each with different capital
requirements based on the credit risk of the asset. The Company's capital ratios
include the assets of the Bank on a consolidated basis in accordance with the
requirements of the Federal Reserve. The Company's capital ratios have exceeded
the minimum required to be classified "well capitalized" for each of the past
three years.
The following table sets forth the minimum required capital ratios and actual
ratios for December 31, 2001, 2000, and 1999.
Capital
Adequacy
Actual Purposes
(dollars in thousands) Amount Ratio Amount Ratio
- -------------------------------------------------------------------------------------------------------------
December 31, 2001
Tier 1 capital (to average assets) $23,106 9.49% $9,738 4.00%
Tier 1 capital (to risk-weighted 23,106 12.27% 7,459 4.00%
assets)
Total capital (to risk-weighted 25,215 13.39% 14,918 8.00%
assets)
December 31, 2000
Tier 1 capital (to average assets) 22,934 9.19% 9,986 4.00%
Tier 1 capital (to risk-weighted 22,934 12.05% 7,613 4.00%
assets)
Total capital (to risk-weighted 24,960 13.11% 15,226 8.00%
assets)
December 31, 1999
Tier 1 capital (to average assets) $22,390 9.28% $9,646 4.00%
Tier 1 capital (to risk-weighted 22,390 12.93% 6,929 4.00%
assets)
Total capital (to risk-weighted 24,320 14.04% 13,857 8.00%
assets)
27
ITEM 7A. Quantitative and Qualitative Disclosure About Market Risk
The Company's results of operations are largely dependent upon its ability to
manage interest rate risk. Management considers interest rate risk to be a
significant market risk that could have a material effect on the Company's
financial condition and results of operations. The Company does not currently
use derivatives to manage market and interest rate risks. All of the Company's
transactions are denominated in U.S. dollars. Approximately 49% of the Company's
loans have interest rates that float with the Company's reference rate. Fixed
rate loans generally are made with a term of five years or less.
In the Asset and Liability section of the Management's Discussion and Analysis
in Item 7 is a table presenting estimated maturity or pricing information
indicating the Company's exposure to interest changes. The assumptions and
description of the process used to manage interest rate risk is further
discussed in the Asset and Liability Management section. The following table
discloses the balances of the financial instruments including the fair value as
of December 31, 2001.
The expected maturities are disclosed based on contractual schedules. Principal
repayments are not considered. The expected maturities for financial liabilities
with no stated maturity reflect estimated future roll-off rates. The roll-off
rates for non-interest bearing deposits, interest bearing demand deposits, money
market accounts, and savings deposits are 15%, 25%, 25% and 20%, respectively.
The interest rates disclosed are based on rates in effect at December 31, 2001.
Fair values are used in accordance with generally accepted accounting principles
as disclosed in the financial statements.
Expected Maturity
Year ended December 31, 2001 there Fair
(dollars in thousands) 2002 2003 2004 2005 2006 after Total Value
- ------------------------------------------------------------------------------------------------------------------------------
Financial Assets
Cash and cash equivalents
Non-interest bearing $10,231 ---- ---- ---- ---- ---- 10,231 10,231
Interest bearing deposits in banks 1,468 ---- ---- ---- ---- ---- 1,468 1,468
Weighted average interest rate 1.87%
Federal funds sold
Fixed rate 3,505 ---- ---- ---- ---- ---- 3,505 3,505
Weighted average interest rate 1.94%
Securities available for sale
Fixed rate 8,889 3,825 5,088 3,535 2,540 6,801 30,678 30,678
Weighted average interest rate 5.54% 6.15% 5.86% 6.47% 6.31% 6.16%
Adjustable rate ---- 995 ---- ---- ---- ---- 995 995
Weighted average interest rate 2.05%
Securities held to maturity
Fixed rate 14 10 481 ---- 116 4,324 4,945 4,942
Weighted average interest rate 5.88% 5.50% 3.80% 6.11% 7.03%
Loans receivable
Fixed rate 11,633 4,161 6,658 6,261 6,313 53,645 88,671 91,306
Weighted average interest rate 8.09% 7.68% 8.76% 8.12% 7.58% 8.02%
Adjustable rate 76,866 1,063 7,983 537 1,284 200 87,933 87,933
Weighted average interest rate 6.20% 7.85% 8.10% 7.77% 7.18% 6.35%
Federal Home Loan Bank stock 3,813 ---- ---- ---- ---- ---- 3,813 3,813
Weighted average interest rate 7.00%
28
Expected Maturity
Year ended December 31, 2000 there Fair
(dollars in thousands) 2002 2003 2004 2005 2006 after Total Value
- ------------------------------------------------------------------------------------------------------------------------------
Financial Liabilities
Non-interest bearing deposits $ 5,765 4,901 4,166 3,541 3,010 17,054 38,437 38,437
Interest bearing checking accounts 6,781 5,086 3,815 2,861 2,145 6,437 27,125 27,125
Weighted average interest rate .89% .89% .89% .89% .89% .89%
Money Market accounts 5,918 4,439 3,329 2,497 1,873 5,619 23,675 23,675
Weighted average interest rate 1.22% 1.22% 1.22% 1.22% 1.22% 1.22%
Savings accounts 10,786 8,628 6,902 5,522 4,418 17,672 53,928 53,928
Weighted average interest rate 1.17% 1.17% 1.17% 1.17% 1.17% 1.17%
Certificates of deposit
Fixed rate 55,745 10,584 1,325 230 304 ---- 68,188 68,458
Weighted average interest rate 3.84% 4.17% 4.39% 4.82% 4.47%
Variable rate 3,291 ---- ---- ---- ---- ---- 3,291 3,291
Weighted average interest rate 3.08%
As illustrated in the tables above, our balance sheet is currently sensitive to
declining interest rates, meaning that more interest earning assets mature or
re-price than interest bearing liabilities. Therefore, if our asset and
liability mix were to remain unchanged, and there was an increase in market
rates of interest, the Company would expect that its net income would be
positively affected. In contrast, a decreasing interest rate environment would
adversely affect such income. While the table presented above provides
information about the Company's interest sensitivity, it does not predict the
trends of future earnings. For this reason, financial modeling is used to
forecast earnings under varying interest rate projections. While this process
assists in managing interest rate risk, it does require significant assumptions
for the projection of loan prepayments, loan origination volumes and liability
funding sources that may prove to be inaccurate.
ITEM 8. Financial Statements and Supplementary Data
Information required for this item is included in Item 14 of this report.
ITEM 9. Changes in and disagreements with accountants on accounting and
financial disclosure
Form 8-K: A report on Form 8-K was filed on September 6, 2001, to report the
merger of Knight, Vale & Gregory PLLC, with McGladrey & Pullen LLP. Based on the
recommendation of the Company's Audit Committee, the Board of Directors approved
the engagement of McGladrey & Pullen LLP as its independent accountants.
Part III
ITEM 10. Directors and Executive Officers of the Registrant
Information concerning directors and executive officers requested by this item
is contained in the registrant's 2002 Proxy Statement in the sections entitled
"MANAGEMENT-Certain Executive Officers," "Proposal No. 1 - Election of
Directors," and "Compliance with Section 16(a) of the Exchange Act" and is
incorporated by reference herein.
29
ITEM 11. Executive Compensation
Information concerning executive compensation requested by this item is
contained in the registrant's 2002 Proxy Statement in the sections entitled
"DIRECTOR'S COMPENSATION" and "EXECUTIVE COMPENSATION" (not including "Audit
Committee Report," "Report of the Compensation Committee" and "Stock Performance
Graph"), and is incorporated by reference herein.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
Information concerning security ownership of certain beneficial owners and
management requested by this item is contained in the registrant's 2002 Proxy
Statement in the section entitled "MANAGEMENT - Security Ownership of Certain
Beneficial Owners and Management," and is incorporated by reference herein.
ITEM 13. Certain Relationships and Related Transactions
Information concerning certain relationships and related transactions requested
by this item is contained in the registrant's 2002 Proxy Statement in the
section entitled "Compensation Committee Interlocks and Insider Participation"
and is incorporated by reference herein.
Part IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) (1) The following financial statements are filed below:
Independent Auditors'Reports
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
(a) (2) Schedules: None
(a) (3) Exhibits: See Exhibit Index immediately following the signature page.
(b) Reports on Form 8-K: None
30
Contents
- --------------------------------------------------------------------------------
Independent Auditors' Reports..............................................32-33
Consolidated Financial Statements
Consolidated Balance Sheets...................................................34
Consolidated Statements of Income.............................................35
Consolidated Statements of Shareholders' Equity...............................36
Consolidated Statements of Cash Flows......................................37-38
Notes to Consolidated Financial Statements.................................39-60
31
Independent Auditor's Report
Board of Directors
Pacific Financial Corporation
Aberdeen, Washington
We have audited the accompanying consolidated balance sheet of Pacific Financial
Corporation and Subsidiary as of December 31, 2001, and the related consolidated
statements of income, shareholders' equity and cash flows for the year then
ended. 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 audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. 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
audit provides 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 Pacific Financial
Corporation and Subsidiary as of December 31, 2001, and the results of their
operations and their cash flows for the year then ended, in conformity with
accounting principles generally accepted in the United States of America.
/s/ McGladrey & Pullen, LLP
MCGLADREY & PULLEN, LLP
Tacoma, Washington
January 31, 2002
32
Independent Auditors' Report
Board of Directors
Pacific Financial Corporation
Aberdeen, Washington
We have audited the accompanying consolidated balance sheets of Pacific
Financial Corporation and Subsidiary as of December 31, 2000 and 1999, and the
related consolidated statements of income, shareholders' equity and cash flows
for each of the three years in the period ended December 31, 2000. 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 Pacific Financial
Corporation and Subsidiary as of December 31, 2000 and 1999, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2000, in conformity with generally accepted accounting
principles.
/s/ Knight Vale & Gregory PLLC
KNIGHT VALE & GREGORY PLLC
Tacoma, Washington
January 26, 2001
33
Consolidated Balance Sheets
- --------------------------------------------------------------------------------
(Dollars in Thousands)
Pacific Financial Corporation and Subsidiary
December 31, 2001 and 2000
2001 2000
Assets
Cash and due from banks $ 10,231 $ 8,619
Interest bearing deposits at other financial institutions 1,468 480
Federal funds sold 3,505 570
Securities available for sale 31,673 53,696
Securities held to maturity (market value $4,942 and $1,376) 4,945 1,376
Federal Home Loan Bank stock, at cost 3,813 3,562
Loans 176,604 177,168
Allowance for credit losses 2,109 2,026
--------- ---------
Loans - net 174,495 175,142
Premises and equipment 4,014 4,122
Foreclosed real estate 1,040 -
Accrued interest receivable 1,405 2,302
Cash surrender value of life insurance 5,579 2,435
Other assets 1,449 1,009
-------- --------
Total assets $243,617 $253,313
======== ========
Liabilities and Shareholders' Equity
Liabilities
Deposits:
Demand $ 38,437 $ 32,510
Savings and interest-bearing demand 104,728 100,143
Time 71,479 80,858
-------- --------
Total deposits 214,644 213,511
Accrued interest payable 441 779
Short-term borrowings - 11,358
Other liabilities 5,018 4,922
-------- --------
Total liabilities 220,103 230,570
-------- --------
Commitments and Contingencies - -
Shareholders' Equity
Common stock (par value $1); authorized: 25,000,000 shares;
issued and outstanding: 2001 - 2,491,629 shares; 2000 - 2,503,130 shares 2,492 2,503
Additional paid-in capital 9,524 9,859
Retained earnings 11,090 10,572
Accumulated other comprehensive income (loss) 408 (191)
-------- --------
Total shareholders' equity 23,514 22,743
-------- --------
Total liabilities and shareholders' equity $243,617 $253,313
======== ========
See notes to consolidated financial statements.
34
Consolidated Statements of Income
- --------------------------------------------------------------------------------
(Dollars in Thousands, Except Per Share Amounts)
Pacific Financial Corporation and Subsidiary
Years Ended December 31, 2001, 2000 and 1999
2001 2000 1999
Interest Income
Loans $14,994 $16,425 $14,062
Federal funds sold and deposits in banks 410 148 570
Securities available for sale:
Taxable 1,638 2,812 2,767
Tax exempt 545 567 675
Securities held to maturity - tax exempt 264 98 108
Federal Home Loan Bank stock dividends 251 222 172
-------- -------- --------
Total interest income 18,102 20,272 18,354
-------- -------- --------
Interest Expense
Deposits 6,340 8,020 6,712
Short-term borrowings 190 577 212
-------- -------- --------
Total interest expense 6,530 8,597 6,924
-------- -------- --------
Net interest income 11,572 11,675 11,430
Provision for Credit Losses 580 635 60
-------- -------- --------
Net interest income after provision for credit losses 10,992 11,040 11,370
Non-Interest Income
Service charges on deposit accounts 828 677 745
Mortgage broker fees 32 9 36
Net gain on sales of securities available for sale - - 9
Other operating income 669 531 465
-------- -------- --------
Total non-interest income 1,529 1,217 1,255
Non-Interest Expense
Salaries and employee benefits 4,058 4,135 3,871
Occupancy 409 388 367
Equipment 554 751 646
State taxes 227 228 235
Data processing 214 229 97
Other 1,731 1,799 1,795
-------- -------- --------
Total non-interest expense 7,193 7,530 7,011
-------- -------- --------
Income before income taxes 5,328 4,727 5,614
Income Taxes 1,521 1,424 1,692
-------- -------- --------
Net income $ 3,807 $ 3,303 $ 3,922
======== ======== ========
Earnings Per Share
Basic $1.53 $1.33 $1.60
Diluted 1.52 1.31 1.59
See notes to consolidated financial statements.
35
Consolidated Statements of Shareholders' Equity
- --------------------------------------------------------------------------------
(Dollars in Thousands)
Pacific Financial Corporation and Subsidiary
Years Ended December 31, 2001, 2000 and 1999
Accumulated
Shares of Additional Other
Common Common Paid-in Retained Comprehensive
Stock Stock Capital Earnings Income (Loss)
Total
Balance at December 31, 1998 488,969 $ 489 $10,972 $ 9,656 $ 368 $21,485
Comprehensive income:
Net income - - - 3,922 - 3,922
Other comprehensive loss,
net of tax:
Change in fair value of
securities available for sale - - - - (1,320) (1,320)
Comprehensive income 2,602
Stock options exercised 8,000 8 472 - - 480
Repurchase of common stock
fractional shares (199) - (24) - - (24)
Dividends on common stock
($1.25 per share) - - - (3,105) - (3,105)
------ ------ ------ ------ ------ ------ ------
Balance at December 31, 1999 496,770 497 11,420 10,473 (952) 21,438
Comprehensive income:
Net income - - - 3,303 - 3,303
Other comprehensive income,
net of tax:
Change in fair value of
securities available for sale - - - - 761 761
Comprehensive income 4,064
5-for-1 stock split 1,987,110 1,987 (1,987) - - -
Stock options exercised 2,750 3 30 - - 33
Stock purchase of branch site 16,500 16 396 - - 412
Dividends on common stock
($1.28 per share) - - - (3,204) - (3,204)
Balance at December 31, 2000 2,503,130 2,503 9,859 10,572 (191) 22,743
Comprehensive income:
Net income - - - 3,807 - 3,807
Other comprehensive income,
net of tax:
Change in fair value of
securities available for sale - - - - 599 599
Comprehensive income 4,406
Stock options exercised 12,750 13 150 - - 163
Repurchase of common stock (24,281) (24) (486) - - (510)
Issuance of common stock 30 - 1 - - 1
Dividends on common stock
($1.32 per share) - - - (3,289) - (3,289)
--------- ------- -------- ------- ------ -------
Balance at December 31, 2001 2,491,629 $ 2,492 $ 9,524 $11,090 $ 408 $23,514
========= ======= ======== ======= ====== =======
See notes to consolidated financial statements.
36
Consolidated Statements of Cash Flows
- --------------------------------------------------------------------------------
(Dollars in Thousands)
Pacific Financial Corporation and Subsidiary
Years Ended December 31, 2001, 2000 and 1999
2001 2000 1999
Cash Flows from Operating Activities
Net income $ 3,807 $ 3,303 $ 3,922
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 423 568 496
Provision for credit losses 580 635 60
Deferred income tax (benefit) 225 (81) (34)
Stock dividends received (251) (222) (172)
Gain on sales of securities available for sale - - - - (9)
Gain (loss) on sales of foreclosed real estate - - (32) 2
(Increase) decrease in interest receivable 897 (298) (140)
Increase (decrease) in interest payable (338) 230 66
Write down of foreclosed real estate 18 - - - -
Other - net (915) 485 (229)
---- --- ----
Net cash provided by operating activities 4,446 4,588 3,962
----- ----- -----
Cash Flows from Investing Activities
Net (increase) decrease in interest bearing deposits in banks (988) 1,264 4,645
Net increase in federal funds sold (2,935) (570) 12,595
Activity in securities available for sale:
Sales 10,694 - - 1,478
Maturities, prepayments and calls 36,987 12,062 27,560
Purchases (24,828) (2,423) (43,322)
Activity in securities held to maturity:
Maturities 190 239 210
Purchases (1,123) - - (100)
Proceeds from sales of loans 1,407 1,293 468
Increase in loans made to customers, net of principal collections (5,165) (26,133) (5,921)
Purchases of premises and equipment (509) (764) (310)
Proceeds from sales of premises and equipment 50 - - - -
Proceeds from sales of foreclosed real estate 161 - - 26
Purchase of bank owned life insurance (3,000) - - - -
------ ------ ------
Net cash provided by (used in) investing activities 10,941 (15,032) (2,671)
------ ------- ------
Cash Flows from Financing Activities
Net increase (decrease) in deposits 1,133 7,372 (4,511)
Net increase (decrease) in short-term borrowings (11,358) 1,683 9,589
Proceeds from issuance of long-term debt 3,000 - - - -
Repayments of long-term debt (3,000) - - - -
Common stock issued 164 33 480
Cash dividends paid (3,204) (3,105) (2,379)
Repurchase of common stock and fractional shares (510) - - (24)
---- ---- ---
Net cash provided by (used in) financing activities (13,775) 5,983 3,155
------- ----- -----
Net change in cash and due from banks 1,612 (4,461) 4,446
Cash and Due from Banks
Beginning of year 8,619 13,080 8,634
----- ------ -----
End of year $10,231 $ 8,619 $13,080
======= ======== =======
(continued)
See notes to consolidated financial statements.
37
Consolidated Statements of Cash Flows
- --------------------------------------------------------------------------------
(concluded) (Dollars in Thousands)
Pacific Financial Corporation and Subsidiary
Years Ended December 31, 2001, 2000 and 1999
2001 2000 1999
Supplemental Disclosures of Cash Flow Information
Interest paid $6,868 $8,367 $6,858
Income taxes paid 1,375 1,247 1,750
Supplemental Disclosures of Non-Cash Investing Activities
Fair value adjustment of securities available for sale, net of tax $ 599 $761 ($1,320)
Transfer of loans to foreclosed real estate 1,733 26 74
Stock purchase of branch site - - 412 - -
Financed sales of foreclosed real estate 514 235 - -
Reclassification of loan receivable to securities available for sale 2,636 - - - -
See notes to consolidated financial statements.
38
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Pacific Financial Corporation and Subsidiary
December 31, 2001 and 2000
Note 1 - Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of Pacific Financial
Corporation (the Company) and its wholly owned subsidiary, The Bank of the
Pacific (the Bank). All significant intercompany transactions and balances have
been eliminated.
Nature of Operations
The Company is a holding company which operates primarily through its subsidiary
bank. The Bank operates ten branches located in Grays Harbor, Pacific and
Wahkiakum Counties in western Washington. The Bank provides loan and deposit
services to customers, who are predominately small- and middle-market businesses
and middle-income individuals in western Washington.
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 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 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 2001
presentation. All dollar amounts, except per share information, are stated in
thousands.
Securities Available for Sale
Securities available for sale consist of debt securities, marketable equity
securities and mutual funds that the Bank intends to hold for an indefinite
period, but not necessarily to maturity. Such securities 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 shareholders' 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.
(continued)
39
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Pacific Financial Corporation and Subsidiary
December 31, 2001 and 2000
Note 1 - Summary of Significant Accounting Policies (continued)
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.
Declines in the fair value of individual securities held to maturity and
available for sale below their cost that are other than temporary result in
write-downs of the individual securities to their fair value. Such write-downs
are included in earnings as realized losses.
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.
The interest on these loans is accounted for on the cash-basis method, until
qualifying for return to accrual. Loans are returned to accrual status when all
the principal and interest amounts contractually due are brought current and
future payments are reasonably assured.
Allowance for Credit Losses
The allowance for credit losses is maintained at a level considered adequate to
provide for estimated losses on existing loans based on evaluating known and
inherent risks in the loan portfolio. The allowance is reduced by loans charged
off, and increased by provisions charged to earnings and recoveries on loans
previously charged off. The allowance is based on management's periodic,
systematic evaluation of factors underlying the quality of the loan portfolio,
including changes in the size and composition of the loan portfolio, the
estimated value of any underlying collateral, actual loan loss experience,
current economic conditions, and detailed analysis of individual loans for which
full collectibility may not be assured. This evaluation is inherently subjective
as it requires estimates that are susceptible to significant revision as more
information becomes available. While management uses the best information
available to make its estimates, future adjustments to the allowance may be
necessary if there is a significant change in economic conditions.
When available information confirms that specific loans or portions thereof are
uncollectible, these amounts are charged off against the allowance for credit
losses. The existence of some or all of the following criteria will generally
confirm that a loss has been incurred: the loan is significantly delinquent and
the borrower has not evidenced the ability or intent to bring the loan current;
the Bank has no recourse to the borrower, or if it does, the borrower has
insufficient assets to pay the debt; the estimated fair value of the loan
collateral is significantly below the current loan balance, and there is little
or no near-term prospect for improvement.
(continued)
40
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Pacific Financial Corporation and Subsidiary
December 31, 2001 and 2000
Note 1 - Summary of Significant Accounting Policies (continued)
Allowance for Credit Losses (concluded)
When management determines that it is probable 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. Factors considered
by management in determining impairment include payment status, collateral
value, and the probability of collecting scheduled principal and interest
payments when due. 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 ultimate recovery of all loans is susceptible to future market factors
beyond the Bank's control. These factors may result in losses or recoveries
differing significantly from those provided for in the financial statements.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation, which
is computed on a straight-line method over the estimated useful lives of the
assets. Leasehold improvements are amortized over the terms of the respective
leases or the estimated useful lives of the improvements, whichever is less.
Gains or losses on dispositions are reflected in earnings.
Foreclosed Real Estate
Real estate properties acquired through, or in lieu of, foreclosure are to be
sold and are initially recorded at the lower of cost or fair value of the
properties less estimated costs of disposal. Any write-down to fair value at the
time of transfer to other real estate owned is charged to the allowance for
credit losses. Properties are evaluated regularly to ensure that the recorded
amounts are supported by their current fair values, and that valuation
allowances to reduce the carrying amounts to fair value less estimated costs to
dispose are recorded as necessary. Any subsequent reductions in carrying values
are charged to income.
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.
(continued)
41
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Pacific Financial Corporation and Subsidiary
December 31, 2001 and 2000
Note 1 - Summary of Significant Accounting Policies (continued)
Income Taxes
Deferred tax assets and liabilities result from differences between the
financial statement carrying amounts and the tax bases of assets and
liabilities, and are reflected at currently enacted income tax rates applicable
to the period in which the deferred tax assets or liabilities are expected to be
realized or settled. The deferred tax provision represents the difference
between the net deferred tax asset/liability at the beginning and end of the
year. As changes in tax laws or rates are enacted, deferred tax assets and
liabilities are adjusted through the provision for income taxes.
The Bank provides for income taxes separately and remits to the Company amounts
currently due.
Stock-Based Compensation
The Company accounts for stock-based awards to employees 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
financial statements for employee stock arrangements. 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.
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 these financial statements:
Cash and Short-Term Instruments
The carrying amounts of cash and short-term instruments approximate
their fair value.
Securities Available for Sale and Held to Maturity
Fair values for securities are based on quoted market prices.
Federal Home Loan Bank Stock
The carrying value of Federal Home Loan Bank stock approximates its
fair value.
Loans
For variable rate loans that reprice frequently and have no
significant change in credit risk, fair values are based on carrying
values. Fair values for fixed rate loans are estimated using
discounted cash flow analyses, using interest rates currently being
offered for loans with similar terms to borrowers of similar credit
quality. Fair values of loans held for sale are based on their
estimated market prices. Fair values for impaired loans are estimated
using discounted cash flow analyses or underlying collateral values,
where applicable.
(continued)
42
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Pacific Financial Corporation and Subsidiary
December 31, 2001 and 2000
Note 1 - Summary of Significant Accounting Policies (continued)
Fair Values of Financial Instruments (concluded)
Deposits
The fair values disclosed for demand deposits are, by definition,
equal to the amount payable on demand at the reporting date (that is,
their carrying amounts). The carrying amounts of variable rate, fixed
term money market accounts and certificates of deposit approximate
their fair values at the reporting date. Fair values for fixed rate
certificates of deposit are estimated using a discounted cash flow
calculation based on interest rates currently being offered on similar
certificates.
Short-Term Borrowings
The carrying amounts of federal funds purchased and other 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 Bank's current incremental borrowing
rates for similar types of borrowing arrangements.
Accrued Interest
The carrying amounts of accrued interest approximate their fair
values.
Off-balance Sheet Instruments
The fair value of commitments to extend credit and standby letters of
credit was estimated using the fees currently charged to enter into
similar agreements, taking into account the remaining terms of the
agreements and the present creditworthiness of the customers.
Cash and Cash Equivalents
The Company considers all amounts included in the balance sheets caption "Cash
and due from banks" to be cash equivalents.
The Company maintains balances in depository institution accounts which, at
times, may exceed federally insured limits. The Company has not experienced any
losses in such accounts.
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.
(continued)
43
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Pacific Financial Corporation and Subsidiary
December 31, 2001 and 2000
Note 1 - Summary of Significant Accounting Policies (concluded)
Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board adopted Financial
Accounting Standards Nos. 141, Business Combinations, and 142, Goodwill and
Other Intangible Assets. 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. Other identifiable intangible assets,
and certain unidentifiable intangible assets arising from certain acquisitions,
will continue to be amortized using the same lives and methods. In June 2001,
the FASB also issued SFAS No. 143, Accounting for Asset Retirement Obligations.
This statement addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
asset 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. 141, 142, 143, and 144 will have a material effect on its financial
position or results of operations.
Note 2 - Restricted Assets
Federal Reserve Board regulations require that the Bank maintains certain
minimum reserve balances in cash and on deposit with the Federal Reserve Bank.
The average amounts of such balances for the years ended December 31, 2001 and
2000 were approximately $2,878 and $2,575, respectively.
Note 3 - Securities
Investment securities have been classified according to management's intent. The
carrying amounts of securities and their approximate fair value are as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Securities Available for Sale
December 31, 2001
U.S. Treasury and Government agency securities $ 3,517 $134 $ - $ 3,651
Obligations of states and political subdivisions 11,359 355 1 11,713
Mortgage-backed securities 3,255 22 56 3,221
Corporate bonds 8,859 170 14 9,015
Mutual funds 4,065 8 - 4,073
------- ---- ---- -------
$ 31,055 $689 $71 $31,673
======= ==== === =======
(continued)
44
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Pacific Financial Corporation and Subsidiary
December 31, 2001 and 2000
Note 3 - Securities (concluded)
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
December 31, 2000
U.S. Treasury and Government agency securities $28,324 $ 18 $229 $28,113
Obligations of states and political subdivisions 12,110 122 54 12,178
Corporate bonds 13,552 18 165 13,405
------- ---- ---- -------
$53,986 $158 $448 $53,696
======= ==== ==== =======
Securities Held to Maturity
December 31, 2001
State and municipal securities $4,945 $ - $ 3 $4,942
December 31, 2000
State and municipal securities $1,376 $ - $ - $1,376
The contractual maturities of investment securities held to maturity and
available for sale at December 31, 2001 are as follows:
Held to Maturity Available for Sale
Amortized Fair Amortized Fair
Cost Value Cost Value
Due in one year or less $ 15 $ 15 $ 4,829 $ 4,919
Due from one year to five years 613 610 13,357 13,745
Due from five to ten years 595 595 2,897 2,973
Due after ten years 3,722 3,722 1,135 1,147
Mortgage-backed securities - - - - 4,772 4,816
Mutual funds - - - - 4,065 4,073
------ ------ ------- -------
Total $4,945 $4,942 $31,055 $31,673
====== ====== ======= =======
Gross gains realized on sales of securities was $9 in 1999. There were no
security sales in 2001 and 2000.
Securities carried at approximately $11,618 at December 31, 2001 and $11,401 at
December 31, 2000 were pledged to secure public deposits and for other purposes
required or permitted by law.
45
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Pacific Financial Corporation and Subsidiary
December 31, 2001 and 2000
Note 4 - Loans
Loans at December 31 consist of the following:
2001 2000
Commercial and agricultural $ 72,427 $ 68,827
Real estate:
Construction 6,554 6,118
Residential 1-4 family 31,089 31,611
Multi-family 2,040 3,495
Commercial 54,894 59,236
Farmland 3,691 1,992
Consumer 5,909 5,889
-------- --------
$176,604 $177,168
======== ========
Changes in the allowance for credit losses for the years ended December 31 are
as follows:
2001 2000 1999
Balance at beginning of year $2,026 $1,930 $1,864
Provision for credit losses 580 635 60
Charge-offs (564) (568) (134)
Recoveries 67 29 140
- - -
Net (charge-offs) recoveries (497) (539) 6
------ ------ ------
Balance at end of year $2,109 $2,026 $1,930
====== ====== ======
Following is a summary of information pertaining to impaired loans:
2001 2000 1999
December 31
Impaired loans without a valuation allowance $ 482 $2,014 $175
Impaired loans with a valuation allowance 1,180 1,114 - -
----- -----
Total impaired loans $1,662 $3,128 $175
====== ====== ====
Valuation allowance related to impaired loans $143 $412 $- -
==== ==== ====
Years Ended December 31
Average investment in impaired loans $1,262 $3,425 $59
Interest income recognized on a cash basis on impaired loans 2 31 11
(continued)
46
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Pacific Financial Corporation and Subsidiary
December 31, 2001 and 2000
Note 4 - Loans (concluded)
At December 31, 2001, there were no commitments to lend additional funds to
borrowers whose loans have been modified. Loans 90 days and over past due and
still accruing interest totaled $79 and $292 at December 31, 2001 and 2000,
respectively.
Certain related parties of the Company, principally directors and their
associates, were loan customers of the Bank in the ordinary course of business
during 2001 and 2000. Total loans outstanding at December 31, 2001 and 2000 to
key officers and directors were $2,390 and $2,751, respectively. During 2001,
new loans of $1,668 were made, and repayments totaled $2,029.
Note 5 - Premises and Equipment
The components of premises and equipment at December 31 are as follows:
2001 2000
Land $1,125 $1,125
Premises 3,884 3,733
Equipment, furniture and fixtures 4,026 4,297
----- -----
9,035 9,155
Less accumulated depreciation and amortization 5,021 5,033
----- -----
Total premises and equipment $4,014 $4,122
====== ======
The Company purchased the property at its Montesano Branch in 2000 for 16,500
shares of the Company's stock.
Note 6 - Deposits
The composition of deposits at December 31 is as follows:
2001 2000
Demand deposits, non-interest bearing $ 38,437 $ 32,510
NOW and money market accounts 50,799 46,047
Savings deposits 53,929 54,112
Time certificates, $100,000 or more 26,453 30,645
Other time certificates 45,026 50,197
-------- --------
Total $214,644 $213,511
======== ========
(continued)
47
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Pacific Financial Corporation and Subsidiary
December 31, 2001 and 2000
Note 6 - Deposits (concluded)
Scheduled maturities of certificates of deposit are as follows for future years
ending December 31:
2002 $58,402
2003 11,219
2004 1,325
2005 230
2006 303
---- -------
$71,479
=======
Note 7 - Short-Term Borrowings
Short-term borrowings generally mature within one to four days from the
transaction date. Information concerning short-term borrowings is summarized as
follows for the years ended December 31:
2001 2000
Average balance during the year $ 963 $ 9,036
Average interest rate during the year 5.68% 6.39%
Maximum month-end balance during the year $7,580 $11,358
Balance outstanding at year-end $ - $11,358
Average interest rate at year-end -% 6.39%
Note 8 - Income Taxes
Income taxes are comprised of the following for the years ended December 31:
2001 2000 1999
Current $1,296 $1,505 $1,726
Deferred (benefit) 225 (81) (34)
------ ------ ------
Total income taxes $1,521 $1,424 $1,692
====== ====== ======
(continued)
48
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Pacific Financial Corporation and Subsidiary
December 31, 2001 and 2000
Note 8 - Income Taxes (concluded)
The tax effects of temporary differences that give rise to significant portions
of deferred tax assets and liabilities at December 31 are:
2001 2000
Deferred Tax Assets
Allowance for credit losses $ 626 $ 597
Deferred compensation 230 247
Unrealized loss on securities available for sale - - 98
Other 70 164
-- ---
Total deferred tax assets 926 1,106
Deferred Tax liabilities
Unrealized gain on securities available for sale 210 - -
Depreciation 68 37
Deferred revenue 1,045 933
----- ---
Total deferred tax liabilities 1,323 970
----- ---
Net deferred tax assets (liabilities) ($ 397) $ 136
======= ======
The following is a reconciliation between the statutory and effective federal
income tax rate for the years ended December 31:
2001 2000 1999
Percent Percent Percent
of Pre-tax of Pre-tax of Pre-tax
Amount Income Amount Income Amount Income
Income tax at statutory rate $1,865 35.0% $1,654 35.0% $1,965 35.0%
Adjustments resulting from:
Tax-exempt income (272) (5.1) (236) (5.0) (261) (4.6)
Net earnings on life insurance
policies (26) (.5) (36) (.7) (35) (.6)
Non-deductible merger costs - - - - - - - - 106 1.9
Other (46) (.8) 42 .9 (83) (1.6)
--- -- ---
Total income tax expense $1,521 28.6% $1,424 30.2% $1,692 30.1%
====== ====== ======
49
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Pacific Financial Corporation and Subsidiary
December 31, 2001 and 2000
Note 9 - Employee Benefits
Incentive Compensation Plan
The Bank has a plan that provides incentive compensation to key employees if the
Bank meets certain performance criteria established by the Board of Directors.
The cost of this plan was $355, $490 and $622 in 2001, 2000 and 1999,
respectively.
401(k) Plans
The Bank has established a 401(k) profit sharing plan for those employees who
meet the eligibility requirements set forth in the plan. Eligible employees may
contribute up to 15% of their compensation. Matching contributions by the Bank
are at the discretion of the Board of Directors. Contributions totaled $115, $94
and $95 for 2001, 2000 and 1999, respectively.
Director and Employee Deferred Compensation Plans
The Company has director and employee deferred compensation plans. Under the
terms of the plans, a director or employee may participate upon approval by the
Board. The participant may then elect to defer a portion of his or her earnings
(directors' fees or salary) as designated at the beginning of each plan year.
Payments begin upon retirement, termination, death or permanent disability, sale
of the Company, the ten-year anniversary of the participant's participation
date, or at the discretion of the Company. There are currently two participants
in the plans. Total deferrals plus earnings were $304, $297 and $327 at December
31, 2001, 2000 and 1999, respectively. There is no expense to the Company for
this plan.
The directors of a bank acquired by the Company in 1999 adopted two deferred
compensation plans for directors -- one plan providing retirement income
benefits for all directors and the other, a deferred compensation plan, covering
only those directors who have chosen to participate in the plan. At the time of
adopting these plans, the Bank purchased life insurance policies on directors
participating in both plans which may be used to fund payments to them under
these plans. Cash surrender values on these policies were $2,555 and $2,435 at
December 31, 2001 and 2000, respectively. In 2001, 2000 and 1999, the net
(benefit)/cost recorded from these plans, including the cost of the related life
insurance, was ($143), $30 and ($3), respectively. Both of these plans were
fully funded and frozen as of September 30, 2000. Plan participants were given
the option to either remain in the plan until reaching the age of 70 or to
receive a lump sum distribution. Participants electing to remain in the plan
will receive annual payments over a ten-year period upon reaching 70 years of
age.
(continued)
50
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Pacific Financial Corporation and Subsidiary
December 31, 2001 and 2000
Note 9 - Employee Benefits (concluded)
Qualified Non-Contributory Defined Benefit Plan
The Company maintained a non-contributory defined benefit plan covering
substantially all employees of the former Bank of the Pacific, which was frozen
and terminated on December 31, 2000. The Bank made annual contributions to the
plan equal to the amount accrued for pension expenses, which were invested in
shares of registered investment companies. Final funding of the plan did not
occur until 2001 upon receipt of plan administrator distribution totals.
Contributions of $149, $312 and $33 were made in 2001, 2000 and 1999,
respectively.
Non-Qualified Deferred Compensation Plan
The Company has a non-qualified deferred compensation plan to cover selected
employees. Its annual contributions to the plan totaled $8, $22 and $19 in 2001,
2000 and 1999, respectively. Covered employees may also contribute to the plan.
The plan was terminated in early 2001.
Note 10 - Commitments and Contingencies
The Bank is party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing needs of their customers. These
financial instruments include commitments to extend credit and standby letters
of credit, and involve, to varying degrees, elements of credit risk in excess of
the amount recognized in the 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 they do for on-balance-sheet instruments. A summary of the Bank's
commitments at December 31 is as follows:
2001 2000
Commitments to extend credit $23,262 $18,480
Standby letters of credit 1,688 1,763
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 67% of loan commitments is 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)
51
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Pacific Financial Corporation and Subsidiary
December 31, 2001 and 2000
Note 10 - Commitments and Contingencies (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.
Certain executive officers have entered into employment contracts with the Bank
which provide for contingent payments subject to future events.
The Bank has agreements with commercial banks for lines of credit totaling
$11,500, none of which was used at December 31, 2001. In addition, the Bank has
a credit line with the Federal Home Loan Bank of Seattle totaling 10% of assets,
none of which was used at December 31, 2001. These borrowings are collateralized
under blanket pledge agreements.
Because of the nature of its activities, the Company is subject to various
pending and threatened legal actions which arise in the ordinary course of
business. In the opinion of management, liabilities arising from these claims,
if any, will not have a material effect on the financial position of the
Company.
Note 11 - Significant Concentrations of Credit Risk
Most of the Bank's business activity is with customers and governmental entities
located in the State of Washington, including investments in state and municipal
securities. Loans are generally limited by state banking regulations to 20% of
the Bank's shareholder's equity, excluding accumulated other comprehensive
income (loss). As of December 31, 2001 the Bank's loans to companies in the
hotel\motel industry totaled $20,956 or 11.87% of total loans. 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
borrowers in excess of $4 million.
52
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Pacific Financial Corporation and Subsidiary
December 31, 2001 and 2000
Note 12 - Stock Options
At December 31, 2001, the Company had options outstanding or available for grant
under three stock-based option plans, which are described below. The Company
applies APB Opinion No. 25 and related interpretations in accounting for these
plans. Accordingly, no compensation cost has been recognized for the 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 since December 31, 1994
under these plans, consistent with the method of SFAS No. 123, the Company's net
income and earnings per share would have been reduced to these pro forma
amounts:
2001 2000 1999
Net income:
As reported $3,807 $3,303 $3,922
Pro forma 3,794 3,280 3,917
Earnings per share:
Basic:
As reported $1.53 $1.33 $1.60
Pro forma 1.52 1.32 1.60
Diluted:
As reported 1.52 1.31 1.59
Pro forma 1.51 1.30 1.58
The Company's three stock incentive plans provide for granting incentive stock
options, as defined under current tax laws, to key personnel and under the plan
adopted in 2000, options not qualified for favorable tax treatment and other
types of stock based awards. Under the first plan, options are exercisable 90
days from the date of grant. These options terminate if not exercised within ten
years from the date of grant. If after six years from the date of grant fewer
than 20% of the options have been exercised, they will expire at a rate of 20%
annually. Under the second plan, the options are exercisable one year from the
date of grant, at a rate of 10% annually. Options terminate if not exercised
when they become available, and no additional grants will be made under these
two plans. The plan adopted in 2000, authorizes the issuance of up to a total of
500,000 shares, (374,000 shares are available for grant at December 31, 2001).
Options become exercisable ratably over five years. Under the plan adopted in
2000, the Company may grant up to 75,000 shares of its common stock to a single
individual in a calendar year.
The fair value of each option granted in 2001 and 1999 was estimated on the date
of grant, based on the Black-Scholes option pricing model and using the
following weighted-average assumptions. There were no options granted in 2000.
2001 1999
Dividend yield 5.76% 4.63%
Expected life 10 years 10 years
Risk-free interest rate 4.92 - 5.19% 6.6%
The weighted average fair value of options granted during 2001 and 1999 were $0
and $2.87, respectively.
(continued)
53
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Pacific Financial Corporation and Subsidiary
December 31, 2001 and 2000
Note 12 - Stock Option (concluded)
A summary of the status of the Company's stock option plans as of December 31,
2001, 2000 and 1999, and changes during the years ending on those dates, is
presented below:
2001 2000 1999
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
Outstanding at beginning of year 74,550 $18.21 78,550 $18.13 93,550 $13.14
Granted 126,000 22.22 - - 25,000 27.00
Exercised (12,750) 12.82 (2,750) 12.00 (40,000) 12.00
Forfeited (3,500) 25.63 (1,250) 27.00 - - - -
------ ------ ------
Outstanding at end of year 184,300 $21.19 74,550 $18.21 78,550 $18.13
======= ====== ======
Exercisable at end of year 32,165 $14.40 34,030 $13.65 13,390 $12.00
The following information summarizes information about stock options outstanding
and exercisable at December 31, 2001:
Weighted
Average
Remaining
Exercise Number Contractual Number
Price Outstanding Life (Years) Exercisable
$12.00 1,000 3 1,000
13.00 9,500 4 9,500
14.40 4,000 5 4,000
15.29 23,550 5 17,665
22.22 124,500 9 - -
23.25 500 9 - -
27.00 21,250 8 - -
------- ------
184,300 32,165
======= ======
Note 13 - Stock Transactions
In June 2000, the Board of Directors effected a 5-for-1 stock split. In
addition, Board of Directors approved an increase in the number of authorized
common shares from 5,000,000 to 25,000,000.
Per share information for prior periods has been adjusted to reflect the effect
of the stock split.
54
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Pacific Financial Corporation and Subsidiary
December 31, 2001 and 2000
Note 14 - 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 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).
As of December 31, 2001, 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, and 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 Company and the Bank's actual capital amounts and ratios are also presented
in the table. Management believes, as of December 31, 2001, the Company and the
Bank meet all capital requirements to which they are subject.
To be Well Capitalized
Under Prompt
Capital Adequacy Corrective Action
Actual Purposes Provisions
Amount Ratio Amount Ratio Amount Ratio
December 31, 2001
Tier 1 capital (to average assets):
Consolidated $23,106 9.49% $ 9,738 4.0% N/A N/A
Bank 23,077 9.48 9,738 4.0 $12,173 5.0%
Tier 1 capital (to risk-weighted assets):
Consolidated 23,106 12.27 7,459 4.0 N/A N/A
Bank 23,077 12.02 7,681 4.0 11,521 6.0
Total capital (to risk-weighted assets):
Consolidated 25,215 13.39 14,918 8.0 N/A N/A
Bank 25,186 13.12 15,362 8.0 19,202 10.0
(continued)
55
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Pacific Financial Corporation and Subsidiary
December 31, 2001 and 2000
Note 14 - Regulatory Matters (concluded)
To be Well Capitalized
Under Prompt
Capital Adequacy Corrective Action
Actual Purposes Provisions
Amount Ratio Amount Ratio Amount Ratio
December 31, 2000
Tier 1 capital (to average assets):
Consolidated $22,934 9.19% $ 9,986 4.00% N/A N/A
Bank 22,895 9.17 9,986 4.00 $12,482 5.00%
Tier 1 capital (to risk-weighted assets):
Consolidated 22,934 12.05 7,613 4.00 N/A N/A
Bank 22,895 12.35 7,413 4.00 11,120 6.00
Total capital (to risk-weighted assets):
Consolidated 24,960 13.11 15,226 8.00 N/A N/A
Bank 24,921 13.45 14,827 8.00 18,533 10.00
Restrictions on Retained Earnings
The Bank is restricted from paying dividends to the Company in an amount that
would violate the most restrictive capital requirement shown above. At December
31, 2001, there were no regulatory dividend restrictions on the Bank's retained
earnings.
Note 15 - Fair Values of Financial Instruments
The estimated fair values of the Company's financial instruments at December 31
are as follows:
2001 2000
Carrying Fair Carrying Fair
Amount Value Amount Value
Financial Assets
Cash and due from banks,
interest-bearing deposits with
banks, and federal funds sold $ 15,204 $ 15,204 $ 9,669 $ 9,669
Securities available for sale 31,673 31,673 53,696 53,696
Securities held to maturity 4,945 4,942 1,376 1,376
Federal Home Loan Bank stock 3,813 3,813 3,562 3,562
Loans receivable 174,495 177,569 175,142 175,375
Accrued interest receivable 1,405 1,405 2,302 2,302
Financial Liabilities
Deposits $214,644 $216,096 $213,511 $213,682
Short-term borrowings - - - - 11,358 11,358
Accrued interest payable 441 441 779 779
56
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Pacific Financial Corporation and Subsidiary
December 31, 2001 and 2000
Note 16 - Earnings Per Share Disclosures
Following is information regarding the calculation of basic and diluted earnings
per share for the years indicated.
Net Income Shares Per Share
(Numerator) (Denominator) Amount
Year Ended December 31, 2001
Basic earnings per share:
Net income $3,807 2,491,426 $1.53
Effect of dilutive securities:
Options - 18,576 (.01)
Diluted earnings per share: ------ --------- -----
Net income $3,807 2,510,002 $1.52
====== ========= =====
Year Ended December 31, 2000
Basic earnings per share:
Net income $3,303 2,492,326 $1.33
Effect of dilutive securities:
Options - 20,493 (.02)
Diluted earnings per share: ------ --------- -----
Net income $3,303 2,512,819 $1.31
====== ========= =====
Year Ended December 31, 1999
Basic earnings per share:
Net income $3,922 2,447,729 $1.60
Effect of dilutive securities:
Options - 23,783 (.01)
Diluted earnings per share: ------ --------- -----
Net income $3,922 2,471,512 $1.59
====== ========= =====
The number of shares shown for "options" is the number of incrementional shares
that would result from the exercise of options and use of the proceeds to
repurchase shares at the average market price during the year.
57
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Pacific Financial Corporation and Subsidiary
December 31, 2001 and 2000
Note 17 - Condensed Financial Information - Parent Company Only
Condensed Balance Sheets - December 31
2001 2000
Assets
Cash $ 3,317 $ 66
Investment in the Bank 23,485 22,703
Due from the Bank - 3,178
-------- --------
Total assets $ 26,802 $ 25,947
======== ========
Liabilities and Shareholders' Equity
Dividends payable $ 3,288 $ 3,204
Shareholders' equity 23,514 22,743
-------- --------
Total liabilities and shareholders' equity $ 26,802 $ 25,947
======== ========
Condensed Statements of Income - Years Ended December 31
2001 2000 1999
Dividend income from the Bank $3,670 $3,275 $3,010
Expenses (46) (151) (377)
Equity in undistributed income of the Bank 183 179 1,289
------ ------ ------
Net income $3,807 $3,303 $3,922
====== ====== ======
(continued)
58
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Pacific Financial Corporation and Subsidiary
December 31, 2001 and 2000
Note 17 - Condensed Financial Information - Parent Company Only (concluded)
Condensed Statements of Cash Flows - Years Ended December 31
2001 2000 1999
Operating Activities
Net income $3,807 $3,303 $3,922
Adjustments to reconcile net income to
net cash provided by operating activities:
Equity in undistributed income of subsidiary (183) (179) (1,289)
Other - net (1) 57 20
- - -
Net cash provided by operating activities 3,623 3,181 2,653
----- ----- -----
Investing Activities
(Increase) decrease in due from the Bank 3,178 (1,794) -
----- ------ -----
Financing Activities
Common stock issued 164 33 480
Dividends paid (3,204) (3,105) (2,379)
Repurchase of common stock and fractional shares (510) - (24)
------ ------ ------
Net cash used in financing activities (3,550) (3,072) (1,923)
------ ------ ------
Net increase (decrease) in cash 3,251 (1,685) 730
Cash
Beginning of year 66 1,751 1,021
------ ------- ------
End of year $3,317 $ 66 $1,751
====== ======= ======
59
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Pacific Financial Corporation and Subsidiary
December 31, 2001 and 2000
Note 18 - Quarterly Data (Unaudited)
First Second Third Fourth
Quarter Quarter Quarter Quarter
Year Ended December 31, 2001
Interest income $4,985 $4,671 $4,401 $4,045
Interest expense 2,151 1,766 1,539 1,074
----- ----- ----- -----
Net interest income 2,834 2,905 2,862 2,971
Provision for credit losses 102 98 98 282
Noninterest income 314 346 442 427
Noninterest expenses 1,808 1,759 1,761 1,866
----- ----- ----- -----
Income before income taxes 1,238 1,394 1,445 1,250
Income taxes 361 429 399 332
------ ------ ------ ------
Net income $ 877 $ 965 $1,046 $ 918
====== ====== ====== ======
Earnings per common share:
Basic $0.35 $0.39 $0.42 $0.37
Diluted 0.35 0.38 0.42 0.36
Year Ended December 31, 2000
Interest income $4,849 $5,099 $5,133 $5,191
Interest expense 1,915 2,096 2,224 2,362
----- ----- ----- -----
Net interest income 2,934 3,003 2,909 2,829
Provision for credit losses 53 52 98 432
Noninterest income 356 305 304 252
Noninterest expense 1,746 1,738 1,723 2,323
----- ----- ----- -----
Income before income taxes 1,491 1,518 1,392 326
Income taxes 467 442 444 71
--- --- --- --
Net income $1,024 $1,076 $ 948 $ 255
====== ====== ====== ======
Earnings per common share:
Basic $ 0.41 $ 0.43 $0.38 $ 0.11
Diluted 0.41 0.43 0.38 0.09
60
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized, on the 21st day of March, 2002.
PACIFIC FINANCIAL CORPORATION
(Registrant)
/s/ Dennis A. Long /s/ John Van Dijk
- --------------------------------- ---------------------------------
Dennis A. Long, President and CEO John Van Dijk, Secretary
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant in
the capacities indicated, on the 21st day of March, 2002.
Principal Executive Officer Principal Financial and Accounting
Officer
/s/ Dennis A. Long /s/ John Van Dijk
- --------------------------------- ---------------------------------
Dennis A. Long, President and CEO John Van Dijk, Treasurer (CFO)
and Director
Remaining Directors
/s/ Sidney R. Snyder
- --------------------------------- ---------------------------------
Joseph A. Malik (Chairman of the Board) Sidney R. Snyder
/s/ Gary C. Forcum /s/ Duane E. Hagstrom
- --------------------------------- ---------------------------------
Gary C. Forcum Duane E. Hagstrom
/s/ Walter L. Westling /s/ Robert A. Hall
- --------------------------------- ---------------------------------
Walter L. Westling Robert A. Hall
/s/ David L. Woodland /s/ Robert J. Worrell
- --------------------------------- ---------------------------------
David L. Woodland Robert J. Worrell
/s/ Susan C. Freese /s/ Randy W. Rognlin
- --------------------------------- ---------------------------------
Susan C. Freese Randy W. Rognlin
61
Exhibit Index
EXHIBIT NO. EXHIBIT
- ----------------- ------------
3.1 Restated Articles of Incorporation (1)
3.2 Bylaws (2)
10 Executive Compensation Plans and Arrangements and
Other Management Contracts
10.1 Employment Agreement for Dennis A. Long (3)
10.2 Employment Agreement for John Van Dijk (3)
10.3 Bank of the Pacific Incentive Stock Option Plan (4)
10.4 The Bank of Grays Harbor Incentive Stock
Option Plan (4)
10.5 2000 Stock Incentive Compensation Plan (5)
10.6 Bonus Program for Officers (5)
10.7 The Bank of Grays Harbor Employee Deferred
Compensation Plan (6)
21 Subsidiaries of Registrant - Bank of the Pacific,
organized under Washington law
23.1 Consent of McGladrey & Pullen, LLP, Independent
Auditors
23.2 Consent of Knight Vale & Gregory PLLC, Independent
Auditors
99 Description of common stock of the Company (7)
(1) Incorporated by reference to Exhibit 3.2 to the Company's Quarterly Report
on Form 10-Q for the quarter ended June 30, 2000.
(2) Incorporated by reference to Exhibit 2b to Form 8-A filed by the Company
and declared effective on March 7, 2000 (Registration No. 000-29829)
(3) Incorporated by reference to Exhibits 10.3 and 10.6 of the Registration
Statement on Form S-4 filed by the Company and declared effective on November
10, 1999 (Registration No. 333-86687).
(4) Incorporated by reference to Exhibits 10.7 and 10.8 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1999.
(5) Incorporated by reference to Exhibits 10.1 and 10.2 to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31, 2000.
(6) Incorporated by reference to Exhibit 10.10 to the Company's Annual Report
on Form 10-K for the year ended December 31, 2000.
(7) Incorporated by reference to Exhibit 99 to the Company's Quarterly Report
on Form 10-Q for the quarter ended September 30, 2000.
62