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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarter ended March 31, 2003
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 by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes No X
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 March 31, 2003
-------------- -----------------------------
Common Stock, par value $1.00 per share 2,512,659 shares
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TABLE OF CONTENTS
PART I FINANCIAL INFORMATION 3
ITEM 1. FINANCIAL STATEMENTS 3
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, 2003 AND DECEMBER 31, 2002 3
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED MARCH 31, 2003 AND 2002 4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2003 AND 2002 5
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
THREE MONTH PERIODS ENDED MARCH 31, 2003 AND 2002 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 14
PART II OTHER INFORMATION 14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 15
ITEM 5. OTHER INFORMATION 15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 15
SIGNATURES AND CERTIFICATIONS 16
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PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets
(Dollars in thousands)
Pacific Financial Corporation
March 31, 2003 and December 31, 2002
March 31, December 31,
2003 2002
(Unaudited)
Assets
Cash and due from banks $ 6,943 $ 8,473
Interest bearing balances with banks 664 373
Federal funds sold 8,580 ---
Investment securities available for sale 51,690 52,230
Investment securities held-to-maturity 10,035 10,362
Federal Home Loan Bank stock, at cost 881 866
Loans held for sale --- 286
Loans 187,045 185,504
Allowance for credit losses 2,354 2,473
-------- --------
Loans, net 184,691 183,031
Premises and equipment 3,766 3,850
Foreclosed real estate 1,058 686
Accrued interest receivable 1,640 1,493
Cash surrender value of life insurance 5,971 5,898
Other assets 1,121 986
-------- --------
Total assets $277,040 $268,534
======== ========
Liabilities and Shareholders' Equity
Deposits:
Non-interest bearing $ 41,424 $ 40,084
Interest bearing 193,934 185,170
-------- --------
Total deposits 235,358 225,254
Accrued interest payable 287 318
Short-term borrowings --- 1,800
Long-term borrowings 13,500 11,000
Other liabilities 2,000 5,479
-------- --------
Total liabilities 251,145 243,851
Shareholders' Equity
Common Stock (par value $1); authorized: 2,513 2,513
25,000,000 shares; issued
March 31,2003-2,512,659 shares;
December 31, 2002-2,512,659 shares
Additional paid-in capital 9,839 9,839
Retained earnings 12,726 11,614
Accumulated other comprehensive income 817 717
-------- --------
Total shareholders' equity 25,895 24,683
-------- --------
Total liabilities and shareholders' equity $277,040 $268,534
======== ========
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Condensed Consolidated Statements of Income
Three months ended March 31, 2003 and 2002
(Dollars in thousands, except per share)
2003 2002
(UNAUDITED) (UNAUDITED)
Interest Income
Loans $3,250 $3,294
Securities held to maturity:
Taxable 73 ---
Tax exempt 48 62
Securities available for sale:
Taxable 431 360
Tax-exempt 117 146
Deposits with banks
and federal funds sold 3 18
------ ------
Total interest income 3,922 3,880
Interest Expense
Deposits 790 938
Other borrowings 109 33
------ ------
Total interest expense 899 971
Net Interest Income 3,023 2,909
Provision for credit losses --- 954
------ ------
Net interest income after provision
for credit losses 3,023 1,955
Non-interest Income
Service charges 250 234
Mortgage loan origination fees 22 ---
Gain (loss) on sale of foreclosed real estate (8) (17)
Gain on sale of investments 4 ---
Other operating income 176 237
------ ------
Total non-interest income 444 454
Non-interest Expense
Salaries and employee benefits 1,140 990
Occupancy and equipment 238 234
Other 532 595
------ ------
Total non-interest expense 1,910 1,819
Income before income taxes 1,557 590
Provision for income taxes 445 182
------ ------
Net Income $1,112 $ 408
====== ======
Earnings per common share:
Basic $.44 $.16
Diluted .44 .16
Average shares outstanding:
Basic 2,512,659 2,491,629
Diluted 2,534,640 2,515,376
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Condensed Consolidated Statements of Cash Flows
Three months ended March 31, 2003 and 2002
(Dollars in thousands)
2003 2002
(UNAUDITED) (UNAUDITED)
OPERATING ACTIVITIES
Net income $ 1,112 $ 408
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for credit losses --- 954
Depreciation and amortization 105 108
Stock dividends received (14) (57)
Proceeds of loans held for sale 286 ---
Gain on sale of investment securities (4) ---
Loss on sale of foreclosed real estate 8 ---
Increase in accrued interest receivable (147) (165)
Decrease in accrued interest payable (31) (38)
Write-down of foreclosed real estate 119 288
Other (274) 176
------- ------
Net cash provided by operating activities 1,160 1,674
INVESTING ACTIVITIES
Net increase in federal funds (8,580) (4,495)
Increase in interest bearing
deposits with banks (291) (647)
Purchase of securities held to maturity (390) ---
Purchase of securities available for sale (4,423) (2,163)
Proceeds from maturities of investments held to maturity 697 30
Proceeds from sales of securities available for sale 2,994 ---
Proceeds from maturities of
securities available for sale 2,055 1,503
Net increase in loans (2,669) (2,707)
Additions to foreclosed real estate (18) ---
Proceeds from sales of foreclosed real estate 534 ---
Additions to premises and equipment (11) (14)
------- -------
Net cash used in investing activities (10,102) (8,493)
FINANCING ACTIVITIES
Net increase in deposits 10,104 5,033
Net decrease in short-term borrowings (1,800) ---
Proceeds from issuance of long-term debt 2,500 4,000
Payment of dividends (3,392) (3,289)
------- -------
Net cash provided by financing activities 7,412 5,744
Net decrease in cash and due from banks $ (1,530) $(1,075)
CASH AND DUE FROM BANKS
Beginning of period $8,473 $10,231
End of period $6,943 $ 9,156
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for:
Interest $ 930 $ 1,009
Income Taxes 375 25
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES
Foreclosed real estate acquired in settlement of loans $ (1,069) $ (212)
Financed sale of foreclosed real estate 54
Change in fair value of securities available
for sale, net of tax 100 (115)
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Condensed Consolidated Statements of Shareholders' Equity
Three months ended March 31, 2003 and 2002
(Dollars in thousands) (Unaudited)
ACCUMULATED
OTHER
ADDITIONAL COMPREHENSIVE
COMMON PAID-IN RETAINED INCOME
STOCK CAPITAL EARNINGS (LOSS) TOTAL
Balance December 31, 2001 $2,492 $9,524 $11,090 $408 $23,514
Other comprehensive income:
Net income 408 408
Change in fair value of (115) (115)
securities available for sale, net
Comprehensive income 293
------ ------ ------- ------ -------
Balance March 31, 2002 $2,492 $9,524 $11,498 $293 $23,807
Balance December 31, 2002 $2,513 $9,839 $11,614 $717 $24,683
Other comprehensive income:
Net income 1,112 1,112
Change in fair value of
securities available for sale, net 100 100
Comprehensive income 1,212
------ ------ ------- ------ -------
Balance March 31, 2003 $2,513 $9,839 $12,726 $817 $25,895
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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 three months ended March 31, 2003, are
not necessarily indicative of the results anticipated for the year ending
December 31, 2003. The December 31, 2002 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)
March 31, 2003
U.S. Government Securities $5,912 $103 $6,015
State and Municipal Securities 4,123 36 4,159
----- --- -----
TOTAL $10,035 $139 $10,174
SECURITIES AVAILABLE FOR SALE AMORTIZED UNREALIZED FAIR
COST GAINS VALUE
(LOSSES)
March 31, 2003
U.S. Government Securities $ 17,741 $356 $18,097
State and Municipal Securities 11,499 687 12,186
Corporate Securities 4,976 171 5,147
Mutual Funds 16,237 23 16,260
------ ------ ------
TOTAL $ 50,453 $1,237 $51,690
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3. Allowance for Credit Losses
THREE MONTHS ENDED TWELVE MONTHS ENDED
MARCH 31, DECEMBER 31,
2003 2002 2002
Balance at beginning of period $2,473 $2,109 $2,109
Provision for possible credit losses --- 954 954
Charge-offs (120) (416) (632)
Recoveries 1 9 42
Net recoveries (charge-offs) (119) (407) (590)
----- ----- -----
Balance at end of period $2,354 $2,656 $2,473
Ratio of net charge-offs to
average loans outstanding .06% .23% .33%
4. Computation of Basic Earnings per Share:
THREE MONTHS ENDED
MARCH 31,
2003 2002
Net Income $1,112,000 $408,000
Shares Outstanding,
Beginning of Period 2,512,659 2,491,629
Shares Repurchased During Period Times
Average Time Outstanding ---- ---
Average Shares Outstanding 2,512,659 2,491,629
Basic Earnings Per Share $.44 $.16
5. Computation of Diluted Earnings Per Share:
THREE MONTHS ENDED
MARCH 31,
2003 2002
Net Income $1,112,000 $408,000
Options Outstanding 210,550 177,046
Proceeds Were Options Exercised $4,763,248 $ 3,773,253
Average Share Price During Period $25.26 $24.50
Proceeds Divided By Average Share Price 188,569 154,010
Incremental Shares 21,981 23,747
Average Shares Outstanding 2,512,659 2,491,629
Incremental Shares
Plus Outstanding Shares 2,534,640 2,515,376
Diluted Earnings Per Share $.44 $.16
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6. Computation of Pro Forma Basic and Diluted Earnings Per Share:
At March 31, 2003, the Company has a stock-based employee compensation plan. The
Company accounts for the plan under recognition and measurement principles of
APB Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations. No stock-based employee compensation cost is reflected in net
income, as all options granted under this plan had an exercise price equal to
the market value of the underlying common stock on the date of grant. The
following table illustrates the effect on net income and earnings per share had
the Company applied the fair value recognition provisions of FASB Statement No.
123, Accounting for Stock-Based Compensation, to stock-based employee
compensation.
THREE MONTHS ENDED
MARCH 31,
2003 2002
Net Income, as reported $1,112,000 $408,000
Less total stock-based compensation
expense determined under fair value
method for all qualifying awards 21,000 14,000
Pro forma net income 1,091,000 394,000
Earnings per Share
Basic:
As reported .44 .16
Pro forma .43 .16
Diluted:
As reported .44 .16
Pro forma .43 .16
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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 may impede our ability to attract and retain borrowers,
depositors and other customers;
2. changes in the interest rate environment may reduce 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. the securities markets may continue to experience a downturn.
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 no
obligation to update forward-looking statements.
NET INCOME. For the three months ended March 31, 2003, Pacific's net income was
$1,112,000 compared to $408,000 for the same period in 2002. The most
significant factor contributing to the increase was a decrease in the provision
for credit losses from $954,000 to zero, partially offset by an increase in the
provision for income taxes. During the first quarter of 2002, management
performed additional analysis on the loan portfolio upon the hiring of a new
chief credit officer and received updated appraisals on some large credits that
warranted additional provisions during February 2002. Management's current year
analysis of the loan portfolio did not warrant an additional provision for
credit losses at this time.
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NET INTEREST INCOME. Net interest income for the three months ended March 31,
2003 increased $114,000, or 3.9%, compared to the same period in 2002. This is
due primarily to increased investment income and decreased interest expense.
Interest income for the three months ended March 31, 2003, increased $42,000, or
1.1%, compared to the comparable period in 2002. Securities balances were higher
during the three months ended March 31, 2003, compared to the three months ended
March 31, 2002 due to the purchases of securities during the third and fourth
quarters of 2002. This increase in securities resulted in higher interest income
of $101,000 on securities. On the other hand, the lower interest rates earned on
loans during the period ended March 31, 2003 due to the 50 basis point drop in
the prime rate during the fourth quarter of 2002 resulted in decreased loan
interest income of $44,000 compared to the same period in 2002. Average total
loans outstanding for the three months ended March 31, 2003, and March 31, 2002,
were $186,953,000, and $181,257,000, respectively, or an increase of 3.1% in
2003 over 2002.
Interest expense for the three months ended March 31, 2003 decreased $72,000, or
7.4%, compared to the same period in 2002. Average interest-bearing deposit
balances for the three months ended March 31, 2003 and March 31, 2002 were
$189,499,000 and $177,368,000, respectively, representing an increase of 6.8%
compared to last year's period. The increase is attributable primarily to growth
in commercial demand deposits, public deposits and retail certificates of
deposit. Average short term borrowings and federal funds purchased for the
periods were $1,542,000 and $3,766,000, respectively, a decrease of 59.1% over
the 2002 period. Average long term borrowings for the three months ended March
31, 2003 were $11,806,000 compared to $4,000,000 for the same period in 2002.
The Company borrowed funds from the Federal Home Loan Bank of Seattle to
purchase investment securities during the third and fourth quarters of 2002.
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
credit 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
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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 at March 31, 2003. Periodic provisions for credit 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. For additional information, please see the discussion under the
heading "Critical Accounting Policy" in Item 7 of our Annual Report on Form 10K
for the year ended December 31, 2002.
During the three months ended March 31, 2003, no provision was provided for
possible credit losses, compared to $954,000 provided in the same period in
2002. For the three months ended March 31, 2003, net charge-offs were $119,000,
compared to net charge-offs of $407,000 during the same period in 2002, and
compared to $590,000 in net charge-offs during the twelve months ended December
31, 2002. The charge-offs for the period ended March 31, 2003 are primarily
related to commercial loan write downs of $119,700.
At March 31, 2003, the allowance for credit losses stood at $2,354,000 compared
to $2,473,000 at December 31, 2002, and $2,656,000 at March 31, 2002. The ratio
of the allowance to total loans outstanding was 1.26%, 1.33% and 1.49%,
respectively, at March 31, 2003, December 31, 2002, and March 31, 2002.
NON-PERFORMING ASSETS AND FORECLOSED REAL ESTATE OWNED. Non-performing assets
totaled $5,083,000 at March 31, 2003. This represents 2.72% of total loans,
compared to $2,552,000 or 1.38% at December 31, 2002, and $3,026,000 or 1.69% at
March 31, 2002. Non-accrual loans at March 31, 2003 totaled $4,025,000 of which
$3,999,000 are secured by real estate. In particular, one loan secured by real
estate totals $3,587,000. Although it was placed in non-accrual status,
management has been in discussions with the borrower and believes the loan will
be brought current over the next 60 days. Based on current analysis, management
believes losses associated with non-accrual loans will be minimal. Foreclosed
real estate consists of various properties secured by real estate with no
individual material balances. The Company has been successful during the recent
months in selling individual properties with minimal impact to net income.
ANALYSIS OF NON-PERFORMING ASSETS
MARCH 31 DECEMBER 31 MARCH 31
(in thousands) 2003 2002 2002
Accruing loans past due 90 days or more $--- $2 $---
Non-accrual loans 4,025 1,864 2,062
Foreclosed real estate 1,058 686 964
----- ----- -----
TOTAL $5,083 $2,552 $3,026
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NON-INTEREST INCOME AND EXPENSE. Non-interest income for the three months ended
March 31, 2003 decreased $10,000 compared to the same period in 2002. Service
charges on deposit accounts increased $16,000 compared to the three months ended
March 31, 2002. Loan origination fees increased $22,000 compared to the three
months ended March 31, 2002. Loss on the sale of other real estate owned
decreased $9,000. Other operating income for the three months ended March 31,
2003 decreased $57,000 compared to the same period in 2002, primarily due to a
decrease in income from operations on real estate owned.
Non-interest expense for the three months ended March 31, 2003 increased $91,000
compared to the same period in 2002. For the three-month period in 2003,
salaries and benefits increased $150,000, primarily due to an increase in the
number of employees and higher bonus accruals. Also, occupancy expenses
increased $4,000, while other expenses decreased $63,000, compared to the same
period in 2002.
INCOME TAXES. The federal income tax provision for the three months ended March
31, 2003 was $445,000, an increase of $263,000 compared to the same period in
2002.
FINANCIAL CONDITION. Total assets were $277,040,000 at March 31, 2003, an
increase of $8,506,000, or 3.2%, over year-end 2002. Loans were $187,045,000 at
March 31, 2003, an increase of $1,254,000, or .7%, over year-end 2002. Total
deposits were $235,358,000 at March 31, 2003, an increase of $10,104,000, or
4.5%, compared to December 31, 2002.
LOANS. Loan detail by category as of March 31, 2003 and December 31, 2002
follows:
March 31, December 31,
2003 2002
Commercial and industrial $61,294 $61,236
Agricultural 7,641 8,558
Real estate mortgage 99,631 101,151
Real estate construction 11,948 9,697
Installment 5,683 4,114
Credit cards and other 848 1,034
-------- --------
Total Loans 187,045 185,790
Allowance for credit losses (2,354) (2,473)
-------- --------
Net Loans $184,691 $183,317
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 $25,895,000 at March 31,
2003, an increase of $1,212,000, or 4.9%, compared to December 31, 2002. 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 $10.31 at March 31, 2003
compared to $9.82 at December 31, 2002. Book value is calculated by dividing
total equity capital by total shares outstanding.
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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 by 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 from 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 modeling environment, which generally depicts a worst-case
situation. Management has assessed the results of the simulation reports as of
March 31, 2003, and believes that there has been no material change since
December 31, 2002.
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
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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.
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Pacific Financial Corporation held its Annual Meeting of Shareholders on
April 16, 2003, at which the shareholders of the Company voted on and approved
the following:
1. The election of one Class B director of Pacific Financial Corporation
(Douglas M. Schermer) for a term expiring at the Annual Meeting of
Shareholders in 2004. The election of four Class A directors of Pacific
Financial Corporation for terms expiring at the Annual Meeting of
Shareholders in 2006.
The voting with respect to each of these matters was as follows:
1. Election of Directors
NAME FOR WITHHOLD
Edwin Ketel 1,752,060 63,305
Dennis A. Long 1,779,885 35,480
Joseph A. Malik 1,777,275 38,090
Robert J. Worrell 1,811,690 3,675
Douglas M. Schermer 1,777,275 38,090
ITEM 5. OTHER INFORMATION
The Company has notified appropriate state regulatory agencies of its
intent to establish a loan production office in Clatsop County, Oregon. It is
anticipated the loan production office will commence operations approximately
July 1, 2003, and will be located in Gearhart, Oregon.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
See Exhibit Index immediately following the Certifications.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter ended March 31, 2003.
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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: May 1, 2003 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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CERTIFICATION OF CHIEF EXECUTIVE OFFICER
UNDER SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
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 officer 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 officer 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 functions):
(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 officer 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: May 1, 2003 /s/ Dennis A. Long
-------------------------------------
Dennis A. Long
President and Chief Executive Officer
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CERTIFICATION OF CHIEF FINANCIAL OFFICER
UNDER SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
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 officer 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 officer 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 functions):
(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 officer 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: May 1, 2003 /s/ John Van Dijk
-----------------------------
John Van Dijk,
Treasurer
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EXHIBIT INDEX
EXHIBIT NO. EXHIBIT
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99 Section 906 Certifications