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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the quarter ended September 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
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
(360) 533-8870
(Address, including zip code, and
telephone number,
including area code, of Registrant's principal executive offices)
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 period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days:
Yes X No
------- -------
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Title of Class Outstanding at September 30, 2002
-------------- ---------------------------------
Common Stock, par value $1.00 per share 2,491,629 shares
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TABLE OF CONTENTS
PART I FINANCIAL INFORMATION 3
ITEM 1. FINANCIAL STATEMENTS 3
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2002 AND DECEMBER 31, 2001 3
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001 4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001 5
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS'EQUITY
NINE MONTH PERIODS ENDED SEPTEMBER 30, 2002 AND 2001 6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 10
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK 14
ITEM 4. CONTROLS AND PROCEDURES 15
PART II OTHER INFORMATION 15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 15
SIGNATURES 15
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PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets
(Dollars in thousands)
Pacific Financial Corporation
September 30, 2002 and December 31, 2001
September 30, December 31,
2002 2001
(Unaudited)
Assets
Cash and due from banks $ 10,198 $ 10,231
Interest bearing balances with banks 3,821 1,468
Federal funds sold 600 3,505
Investment securities available for sale 51,658 31,673
Investment securities held-to-maturity 10,089 4,945
Federal Home Loan Bank stock, at cost 854 3,813
Loans 183,098 176,604
Allowance for credit losses 2,546 2,109
----- -----
Loans, net 180,552 174,495
Premises and equipment 3,898 4,014
Foreclosed real estate 321 1,040
Accrued interest receivable 1,546 1,405
Cash surrender value of life insurance 5,822 5,579
Other assets 894 1,449
--- -----
Total assets $270,253 $243,617
Liabilities and Shareholders' Equity
Deposits:
Non-interest bearing $ 39,872 $ 38,437
Interest bearing 190,698 176,207
------- -------
Total deposits 230,570 214,644
Accrued interest payable 349 441
Long-term borrowings 11,000 ---
Other liabilities 1,816 5,018
----- -----
Total liabilities 243,735 220,103
Shareholders' Equity
Common Stock (par value $1); authorized: 2,492 2,492
25,000,000 shares; issued September 31,2002-2,491,629 shares;
December 31, 2001-2,491,629 shares
Additional paid-in capital 9,524 9,524
Retained earnings 13,817 11,090
Accumulated other comprehensive income 685 408
--- ---
Total shareholders' equity 26,518 23,514
-------- --------
Total liabilities and shareholders' equity $270,253 $243,617
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Condensed Consolidated Statements of Income
(Dollars in thousands, except per share) THREE MONTHS ENDED NINE MONTHS ENDED
(Unaudited) SEPTEMBER 30, SEPTEMBER 30,
2002 2001 2002 2001
Interest Income
Loans $3,237 $3,690 $9,867 $11,717
Securities held to maturity:
Taxable 54 ---- 54 ----
Tax exempt 100 23 226 68
Securities available for sale:
Taxable 391 407 1,099 1,523
Tax-exempt 133 138 422 414
Deposits with banks
and federal funds sold 27 143 84 335
----- -------- ---- --------
Total interest income 3,930 4,401 11,752 14,057
Interest Expense
Deposits 972 1,478 2,854 5,266
Other borrowings 74 61 144 190
------ ------ ------ -------
Total interest expense 1,046 1,539 2,998 5,456
Net Interest Income 2,896 2,862 8,754 8,601
Provision for credit losses ---- 98 954 298
--------- ------- ------ -------
Net interest income after provision
for credit losses 2,896 2,764 7,800 8,303
Non-interest Income
Service charges 279 203 807 582
Mortgage loan origination fees ---- 13 ---- 27
Gain on sale of foreclosed real estate 19 ---- 160 ----
Other operating income 179 226 668 493
--- --- --- ---
Total non-interest income 480 442 1,635 1,102
Non-interest Expense
Salaries and employee benefits 1,088 980 3,110 3,038
Occupancy and equipment 246 242 730 712
Other 514 539 1,700 1,578
------ ------ ----- -----
Total non-interest expense 1,848 1,761 5,540 5,328
Income before income taxes 1,525 1,445 3,895 4,077
Provision for income taxes 452 399 1,168 1,189
---- ------ ------- -----
Net Income $1,073 $1,046 $2,727 $2,888
Earnings per common share:
Basic $.43 $.42 $1.09 $1.16
Diluted .43 .42 1.09 1.15
Average shares outstanding:
Basic 2,491,629 2,484,284 2,491,629 2,495,047
Diluted 2,508,109 2,508,707 2,512,393 2,519,843
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Condensed Consolidated Statements of Cash Flows
Nine months ended September 30, 2002 and 2001
(Dollars in thousands)
(Unaudited) 2002 2001
OPERATING ACTIVITIES
Net income $2,727 $2,888
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for credit losses 954 298
Depreciation and amortization 324 314
Stock dividends received (174) (185)
Loss on sale of premises and equipment ---- 1
Gain on sale of foreclosed real estate (160) ----
(Increase) decrease in accrued interest receivable (141) 534
Decrease in accrued interest payable (92) (226)
Write-down of foreclosed real estate 402 ----
Other (1,735) (539)
--------- -------
Net cash provided by operating activities 3,124 3,085
INVESTING ACTIVITIES
Net (increase) decrease in federal funds sold 2,905 (8,590)
Increase in interest bearing
deposits with banks (2,353) (8,051)
Purchase of securities held to maturity (7,967) (683)
Purchases of securities available for sale (32,024) (15,273)
Proceeds from maturities of securities held to maturity 2,819 85
Proceeds from maturities of securities available for sale 15,515 25,500
Proceeds from sales of securities available for sale ---- 10,694
Net decrease (increase) in loans (7,209) 4,260
Proceeds from sales of foreclosed real estate 707 ----
Additions to foreclosed real estate (25) ----
Additions to premises and equipment (181) (327)
Proceeds from sales of premises and equipment ---- 16
---- --
Net cash provided by (used in) investing activities (26,794) 7,631
FINANCING ACTIVITIES
Net increase in deposits 15,926 4,081
Net decrease in short-term borrowings ---- (11,358)
Proceeds from issuance of long-term debt 11,000 ----
Repurchase and retirement of common stock ---- (510)
Payment of dividends (3,289) (3,204)
------- -------
Net cash provided by (used in) financing activities 23,637 (10,991)
Net increase (decrease) in cash and due from banks (33) (275)
CASH AND DUE FROM BANKS
Beginning of period 10,231 8,619
End of period $10,198 $8,344
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for:
Interest $3,090 $5,492
Income Taxes 1,040 1,125
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES
Foreclosed real estate acquired in settlement of loans $ (834) $ (1,733)
Financed sale of foreclosed real estate 628 231
Change in fair value of securities available
for sale, net of tax $ 277 $ 789
-5-
Condensed Consolidated Statements of Shareholders' Equity
Nine months ended September 30, 2002 and 2001
(Dollars in thousands) (Unaudited) ACCUMULATED
OTHER
ADDITIONAL COMPREHENSIVE
COMMON PAID-IN RETAINED INCOME
STOCK CAPITAL EARNINGS (LOSS) TOTAL
Balance December 31, 2000 $2,503 $9,859 $10,572 $(191) $22,743
Stock re-purchase (24) (486) (510)
Other comprehensive income:
Net income 2,888 2,888
Change in fair value of
securities available for sale, net 789 789
Comprehensive income 3,677
---- ----- ------ ----- ------
Balance September 30, 2001 $2,479 $9,373 $13,460 $598 $25,910
Balance December 31, 2001 $2,492 $9,524 $11,090 $408 $23,514
Other comprehensive income:
Net income 2,727 2,727
Change in fair vale of
securities available for sale, net 277 277
Comprehensive income 3,004
---- ------ ------ ------ ------
Balance September 30, 2002 $2,492 $9,524 $13,817 $685 $26,518
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NOTES TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared by Pacific
Financial Corporation ("Pacific" or the "Company") in accordance with accounting
principles generally accepted in the United States of America for interim
financial information and with instructions to Form 10-Q. Accordingly, they do
not include all of the information and footnotes required by accounting
principles generally accepted in the United States of America for complete
financial statements. In the opinion of management, adjustments (consisting of
normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the nine months ended September 30, 2002,
are not necessarily indicative of the results anticipated for the year ending
December 31, 2002. The December 31, 2001 condensed balance sheet is derived from
the audited consolidated financial statements.
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those estimates.
All dollar amounts in tables, except per share information, are stated in
thousands.
2. INVESTMENT SECURITIES
Investment securities consist principally of short and intermediate term debt
instruments issued by the U.S. Treasury, other U.S. government agencies, state
and local government units, and other corporations.
SECURITIES HELD TO MATURITY AMORTIZED UNREALIZED FAIR
COST GAINS VALUE
(LOSSES)
September 30, 2002
U.S. Government Securities $ 7,110 $ -- $ 7,110
State and Municipal Securities 2,979 40 3,019
------ ------ ------
TOTAL $ 10,089 $ 40 $10,129
SECURITIES AVAILABLE FOR SALE AMORTIZED UNREALIZED FAIR
COST GAINS VALUE
(LOSSES)
September 30, 2002
U.S. Government Securities $ 18,566 $ 252 $18,818
State and Municipal Securities 11,358 619 11,977
Corporate Securities 5,982 120 6,102
Mutual Funds 14,714 47 14,761
------ ------ ------
TOTAL $ 50,620 $1,038 $51,658
-7-
3. ALLOWANCE FOR CREDIT LOSSES
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2002 2001 2002 2001
Balance at beginning of period $2,559 $1,875 $2,109 $2,026
Provision for possible credit losses -- 98 954 298
Charge-offs (31) (147) (554) (503)
Recoveries 18 2 37 7
Net charge-offs (13) (145) (517) (496)
---- ---- ---- ----
Balance at end of period $2,546 $1,828 $2,546 $1,828
4. COMPUTATION OF BASIC EARNINGS PER SHARE:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2002 2001 2002 2001
Net Income $1,073,000 $1,046,000 $2,727,000 $2,888,000
Shares Outstanding,
Beginning of Period 2,491,629 2,498,849 2,491,629 2,503,130
Shares Repurchased During Period Times
Average Time Outstanding -- (14,565) -- (8,083)
Average Shares Outstanding 2,491,629 2,484,284 2,491,629 2,495,047
Basic Earnings Per Share $.43 $.42 $1.09 $1.16
5. COMPUTATION OF DILUTED EARNINGS PER SHARE:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2002 2001 2002 2001
Net Income $1,073,000 $1,046,000 $2,727,000 $2,888,000
Options Outstanding 177,046 168,300 177,046 168,300
Proceeds Were Options Exercised $3,747,746 $3,327,865 $3,759,199 $3,327,865
Average Share Price During Period $23.24 $23.13 $23.75 $23.19
Proceeds Divided By Average Share Price 161,263 143,877 158,282 143,504
Incremental Shares 16,480 24,423 18,764 24,796
Average Shares Outstanding 2,491,629 2,484,284 2,491,629 2,495,047
Incremental Shares
Plus Outstanding Shares 2,508,109 2,508,707 2,510,393 2,519,843
Diluted Earnings Per Share $.43 $.42 $1.09 $1.15
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
A WARNING ABOUT FORWARD-LOOKING INFORMATION
This document contains forward-looking statements that are subject to risks
and uncertainties. These statements are based on the beliefs and assumptions of
our management, and on information currently available to them. Forward-looking
statements include the information concerning our possible future results of
operations set forth under "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and statements preceded by, followed by or
that include the words "believes," "expects," "anticipates," "intends," "plans,"
"estimates" or similar expressions.
Any forward-looking statements in this document are subject to risks
relating to, among other things, the following:
1. competitive pressures among depository and other financial
institutions which may impede our ability to attract and retain
borrowers, depositors and other customers;
2. changes in the interest rate environment resulting in reduced
margins;
3. general economic or business conditions, either nationally or in the
state or regions in which we do business, may be less favorable than
expected, resulting in, among other things, a deterioration in credit
quality, including as a result of lower prices in the real estate
market, or a reduced demand for credit;
4. legislative or regulatory changes may adversely affect the
businesses in which we are engaged; and
5. continued downturns in the securities markets
Our management believes the forward-looking statements are reasonable;
however, you should not place undue reliance on them. Forward-looking statements
are not guarantees of performance. They involve risks, uncertainties and
assumptions. Many of the factors that will determine our future results and
share value are beyond our ability to control or predict. We undertake on
obligation to update forward-looking statements.
NET INCOME. For the nine months ended September 30, 2002, Pacific's net income
was $2,727,000 compared to $2,888,000 for the same period in 2001, a decrease of
$161,000. The most significant factor contributing to the decrease was a
significant increase in the provision for credit losses. Net income for the
three months ended September 30, 2002 was $1,073,000, which compared to
$1,046,000 during the same period in 2001. The increase was attributable to
increased net interest income, lower loan loss provision and increased
non-interest income.
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NET INTEREST INCOME. Net interest income for the three months ended September
30, 2002 increased $34,000, or 1.2% compared to the same period in 2001. Net
interest income for the nine months ended September 30, 2002 increased $153,000
over the comparable period in 2001.
Interest income for the three months ended September 30, 2002, decreased
$471,000, or 10.7%, compared to the comparable period in 2001, and for the first
nine months of 2002 decreased $2,305,000, or 16.4% from the same period in 2001.
The lower interest rates earned on loans and securities during the nine month
period ending September 30, 2002 was the primary reason for the decline in
interest income. In addition, federal funds sold decreased during the three and
nine month periods ended September 30, 2002 resulting in decreases of $116,000
and $251,000, respectively, in interest income compared to the same periods in
2001. Average total loans outstanding for the nine months ended September 30,
2002, and September 30, 2001, were $179,833,000, and $172,600,000, respectively,
or an increase of 4.2%.
Interest expense for the three months ended September 30, 2002 decreased
$493,000, or 32%, compared to the same period in 2001, and decreased $2,458,000,
or 45.1%, for the nine months ended September 30, 2001 over the comparable
period in 2001. Average interest-bearing deposit balances for the nine months
ended September 30, 2002 and September 30, 2001 were $181,987,000 and
$180,469,000, respectively, while short term borrowings and federal funds
purchased for the periods were $144,000 and $4,098,000, respectively, a decrease
of 96.5% over the 2001 period. Average long term borrowings for the periods were
$5,130,000 and none, respectively.
PROVISION AND 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
credit losses is charged to current expense. This provision acts to replenish
the allowance for credit 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 credit 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
-10-
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.
During the three months ended September 30, 2002, no provision was provided for
possible credit losses, compared to $98,000 provided in the same period in 2001.
For the nine months ended September 30, 2002 $954,000 was provided for possible
credit losses compared to $298,000 for the comparable period in 2001. The higher
provision in 2002 results from increased net charge-offs experienced in 2002.
For the nine months ended September 30, 2002, net charge-offs were $517,000,
compared to net charge-offs of $496,000 during the same period in 2001. The
charge-offs for the period ending September 30, 2002 are primarily related to
commercial real estate and commercial loan write downs of $388,942.
At September 30, 2002, the allowance for credit losses stood at $2,546,000
compared to $2,109,000 at December 31, 2001, and $1,828,000 at September 30,
2001. The ratio of the allowance to total loans outstanding was 1.40%, 1.19% and
1.07%, respectively, at September 30, 2002, December 31, 2001, and September 30,
2001. Management considers the allowance for possible credit losses to be
adequate for the periods indicated.
NON-PERFORMING ASSETS AND FORECLOSED REAL ESTATE OWNED. Non-performing assets
totaled $2,651,000 at September 30, 2002. This represents 1.46% of total loans,
compared to $2,373,000 or 1.34% at December 31, 2001, and $2,825,000 or 1.65% at
September 30, 2001. The primary reason for the increase during the period ended
September 30, 2002, was placement of a commercial real estate loan in
non-accrual status. Foreclosed real estate decreased $719,000 during the nine
months ended September 30, 2002, as a result of the sale of a commercial real
estate property. Based on current analysis, management believes losses
associated with non-accrual loans will be minimal.
ANALYSIS OF NON-PERFORMING ASSETS
SEPTEMBER 30 DECEMBER 31 SEPTEMBER 30
(in thousands) 2002 2001 2001
Accruing loans past due 90 days or more $ -- $79 $342
Non-accrual loans 2,330 1,254 981
Foreclosed real estate 321 1,040 1,502
----- ----- -----
TOTAL $2,651 $2,373 $2,825
NON-INTEREST INCOME AND EXPENSES. Non-interest income for the three and nine
month periods ended September 30, 2002 increased $38,000 and $533,000,
respectively, compared to the same periods in 2001. Service charges on deposit
accounts increased $76,000 and $225,000 compared to the same three and nine
month periods in 2001, due primarily to the new customer overdraft protection
program implemented mid 2001. Mortgage loan origination fees decreased $13,000
and $27,000 compared to the same periods in 2001. Gain on sale of foreclosed
real estate was
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$19,000 and $160,000 for the three and nine month periods ended September 30,
2002, compared to none for the same periods in 2001 due to the sale of three
foreclosed properties. Other operating income for the three months ended
September 30, 2002 decreased $47,000 compared to the same period in 2001 and for
the nine months ended September 30, 2002 increased $175,000 compared to the same
period in 2001, primarily due to income from operations on real estate owned and
earnings on bank owned life insurance.
Non-interest expense for the three and nine months ended September 30, 2002
increased $87,000 and $212,000, respectively, compared to the same period in
2001. For the three-month period in 2002, salaries and benefits increased
$108,000, occupancy expense increased $4,000, and other expenses decreased
$25,000, compared to the same period in 2001. The increase in salaries and
benefits was primarily due to increased staffing levels. Increased maintenance
costs were the reason for the increase in occupancy expense. For the nine months
ended September 30, 2002, salaries and benefits increased $72,000, occupancy
expense increased $18,000 due to maintenance costs, and other expenses increased
$122,000 related primarily to operations on real estate owned.
INCOME TAXES. The federal income tax provision for the nine months ended
September 30, 2002 was $1,168,000, a decrease of $21,000 compared to the same
period in 2001.
FINANCIAL CONDITION. Total assets were $270,253,000 at September 30, 2002, an
increase of $26,636,000, or 10.9%, over year-end 2001. This is primarily due to
deposit growth and an increase in long-term borrowings of $11,000,000 during the
nine months ended September 30, 2002. Deposit growth typically increases during
the third quarter of each year due to the large number of bank customers active
in various tourism activities in the Bank's market area. In addition, the Bank
attracted additional deposit balances during a deposit campaign during the first
part of 2002. The proceeds of the borrowings along with other available
short-term liquid assets were used to fund loans and purchase taxable investment
securities. The Bank sold its Federal Home Loan Bank (FHLB) stock during the
third quarter of 2002, in accordance with the FHLB stock redemption plan. Loans
were $180,552,000 at September 30, 2002, an increase of $6,057,000, or 3.5%,
over year-end 2001. Investment securities totaled $61,747,000 at September 30,
2002, an increase of $25,129,000, or 68.6%, over year-end 2001. Total deposits
were $230,570,000 at September 30, 2002, an increase of $15,926,000, or 7.4%,
compared to December 31, 2001.
LOANS. Loan detail by category as of September 30, 2002 and December 31, 2001
were as follows:
September 30, December 31,
2002 2001
Commercial and industrial $60,379 $62,595
Agricultural 8,670 9,832
Real estate mortgage 98,836 91,714
Real estate construction 9,020 6,554
Installment 5,189 4,941
Credit cards and other 1,004 968
------- -------
Total Loans 183,098 176,604
Allowance for credit losses (2,546) (2,109)
------- -------
Net Loans $180,552 $174,495
-12-
LIQUIDITY. Adequate liquidity is available to accommodate fluctuations in
deposit levels, fund operations, and provide for customer credit needs and meet
obligations and commitments on a timely basis. The Company has no brokered
deposits. It generally has been a net seller of federal funds. When necessary,
liquidity can be increased by taking advances available from the Federal Home
Loan Bank of Seattle.
SHAREHOLDERS' EQUITY. Total shareholders' equity was $26,518,000 at September
30, 2002, an increase of $3,004,000, or 12.8%, compared to December 31, 2001.
The increase was due to net income and an increase in the fair value of
securities available for sale. Book value per share increased to $10.64 at
September 30, 2002 compared to $9.44 at December 31, 2001. Book value is
calculated by dividing total equity capital by total shares outstanding.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest rate, credit, and operations risks are the most significant market
risks which affect the Company's performance. The Company relies on loan review,
prudent loan underwriting standards and an adequate allowance for possible
credit losses to mitigate credit risk.
An asset/liability management simulation model is used to measure interest rate
risk. The model produces regulatory oriented measurements of interest rate risk
exposure. The model quantifies interest rate risk through simulating forecasted
net interest income over a 12 month time period under various interest rate
scenarios, as well as monitoring the change in the present value of equity under
the same rate scenarios. The present value of equity is defined as the
difference between the market value of assets less current liabilities. By
measuring the change in the present value of equity under various rate
scenarios, management is able to identify interest rate risk that may not be
evident in changes in forecasted net interest income.
The Company is currently asset sensitive, meaning that interest earning assets
mature or re-price more quickly than interest-bearing liabilities in a given
period. Therefore, a significant increase in market rates of interest could
improve net interest income. Conversely, a decreasing rate environment may
adversely affect net interest income.
It should be noted that the simulation model does not take into account future
management actions that could be undertaken should actual market rates change
during the year. An important point should be kept in mind; the model simulation
results are not exact measures of the Company's actual interest rate risk. They
are rather only indicators of rate risk exposure, based on assumptions produced
in a simplified modeling environment designed to heighten sensitivity to changes
in interest rates. The rate risk exposure results of the simulation model
typically are greater than the Company's actual rate risk. That is due to the
conservative
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modeling environment, which generally depicts a worst-case situation. Management
has assessed the results of the simulation reports as of September 30, 2002, and
believes that there has been no material change since December 31, 2001.
ITEM 4. CONTROLS AND PROCEDURES
Our disclosure controls and procedures are designed to ensure that information
the Company must disclose in its reports filed or submitted under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), is recorded, processed,
summarized, and reported on a timely basis. Within 90 days prior to the filing
of this report, we carried out an evaluation, under the supervision and with the
participation of our chief executive officer ("CEO") and chief financial officer
("CFO"), of the effectiveness of our disclosure controls and procedures. Based
on that evaluation, the CEO and CFO have concluded that the Company's disclosure
controls and procedures are effective in bringing to their attention on a timely
basis information required to be disclosed by the Company in reports that it
files or submits under the Exchange Act. Also, since the date of their
evaluation, there have not been any significant changes in the Company's
internal controls or in other factors that could significantly affect those
controls, including any corrective actions with regard to significant
deficiencies and material weaknesses.
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PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a)Exhibits:
No exhibits are filed with this report.
(b)Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter ended
September 30, 2002.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PACIFIC FINANCIAL CORPORATION
DATED: November 11, 2002 By: /s/ Dennis A. Long
----------------------
Dennis A. Long
President
By: /s/ John Van Dijk
----------------------
John Van Dijk, Secretary/Treasurer
(Principal Financial and
Accounting Officer)
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The undersigned certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to
ss. 906 of the Sarbanes-Oxley Act of 2002, that the preceding Quarterly Report
on Form 10-Q fully complies with the requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934, and the information contained therein
fairly presents, in all material respects, the financial condition and results
of operations of Pacific Financial Corporation.
/s/ Dennis A. Long /s/ John Van Dijk
- ------------------------ ---------------------------
Dennis A. Long John Van Dijk
President Secretary/Treasurer
Chief Executive Officer Chief Financial Officer
November 11, 2002 November 11, 2002
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CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, Dennis A. Long, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Pacific Financial
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
(c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 11, 2002 /s/ Dennis A. Long
------------------------------
Dennis A. Long
President and
Chief Executive Officer
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CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, John Van Dijk, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Pacific Financial
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
(c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 11, 2002 /s/ John Van Dijk
--------------------------------
John Van Dijk
Treasurer
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