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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 September 30, 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 September 30, 2003
-------------- ---------------------------------
Common Stock, par value $1.00 per share 2,512,669 shares
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-1-
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION 3
ITEM 1. FINANCIAL STATEMENTS 3
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2003 AND DECEMBER 31, 2002 3
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002 4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002 5
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS'
EQUITY NINE MONTH PERIODS ENDED SEPTEMBER 30, 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 15
ITEM 4. CONTROLS AND PROCEDURES 15
PART II OTHER INFORMATION 15
ITEM 5. OTHER INFORMATION 16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 16
SIGNATURES 16
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PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets
(Dollars in thousands)
Pacific Financial Corporation
September 30, 2003 and December 31, 2002
September 30, December 31,
2003 2002
(Unaudited)
Assets
Cash and due from banks $ 11,160 $ 8,473
Interest bearing balances with banks 7,313 373
Federal funds sold 5,590 ---
Investment securities available for sale 58,591 52,230
Investment securities held-to-maturity 8,801 10,362
Federal Home Loan Bank stock, at cost 904 866
Loans held for sale --- 286
Loans 193,669 185,504
Allowance for credit losses 2,353 2,473
-------- --------
Loans, net 191,316 183,031
Premises and equipment 3,730 3,850
Foreclosed real estate 898 686
Accrued interest receivable 1,462 1,493
Cash surrender value of life insurance 6,120 5,898
Other assets 1,330 986
-------- --------
Total assets $297,215 $268,534
======== ========
Liabilities and Shareholders' Equity
Deposits:
Non-interest bearing $ 42,903 $ 40,084
Interest bearing 209,851 185,170
-------- --------
Total deposits 252,754 225,254
======== ========
Accrued interest payable 235 318
Short-term borrowings --- 1,800
Long-term borrowings 14,500 11,000
Other liabilities 1,769 5,479
-------- --------
Total liabilities 269,258 243,851
======== ========
Shareholders' Equity
Common Stock (par value $1); authorized: 2,513 2,513
25,000,000 shares; issued September 30,
2003-2,512,669 shares;
December 31, 2002-2,512,659 shares
Additional paid-in capital 9,839 9,839
Retained earnings 15,071 11,614
Accumulated other comprehensive income 534 717
-------- --------
Total shareholders' equity 27,957 24,683
======== ========
Total liabilities and shareholders' equity $297,215 $268,534
======== ========
-3-
Condensed Consolidated Statements of Income
(Dollars in thousands, except per share) THREE MONTHS ENDED NINE MONTHS ENDED
(Unaudited) SEPTEMBER 30, SEPTEMBER 30,
2003 2002 2003 2002
Interest Income
Loans $ 3,345 $ 3,237 $ 9,957 $ 9,867
Securities held to maturity:
Taxable 23 54 141 54
Tax-exempt 54 100 154 226
Securities available for sale:
Taxable 387 391 1,205 1,099
Tax-exempt 119 133 355 422
Deposits with banks
and federal funds sold 54 27 83 84
------- ------- ------- -------
Total interest income 3,982 3,930 11,895 11,752
======= ======= ======= =======
Interest Expense
Deposits 697 972 2,261 2,854
Other borrowings 127 74 358 144
------- ------- ------- -------
Total interest expense 824 1,046 2,619 2,998
======= ======= ======= =======
Net Interest Income 3,158 2,896 9,276 8,754
Provision for credit losses --- --- --- 954
------- ------- ------- -------
Net interest income after provision
for credit losses 3,158 2,896 9,276 7,800
Non-interest Income
Service charges 235 279 763 807
Mortgage loan origination fees 48 --- 89 ---
Gain on sale of loans 30 --- 30 ---
Gain on sale of foreclosed real estate 38 19 33 160
Gain on sale of investments held for sale --- --- 4 ---
Other operating income 188 179 521 668
------- ------- ------- -------
Total non-interest income 539 480 1,440 1,635
======= ======= ======= =======
Non-interest Expense
Salaries and employee benefits 1,206 1,088 3,519 3,110
Occupancy and equipment 240 246 718 730
Other 557 514 1,607 1,700
------- ------- ------- -------
Total non-interest expense 2,003 1,848 5,844 5,540
Income before income taxes 1,694 1,525 4,872 3,895
Provision for income taxes 500 452 1,415 1,168
------- ------- ------- -------
Net Income $ 1,194 $ 1,073 $ 3,457 $ 2,727
======= ======= ======= =======
Earnings per common share:
Basic $ .48 $ .43 $ 1.38 $ 1.09
Diluted .47 .43 1.35 1.09
Average shares outstanding:
Basic 2,512,669 2,491,629 2,512,665 2,491,629
Diluted 2,564,017 2,509,193 2,553,785 2,511,860
-4-
Condensed Consolidated Statements of Cash Flows
Nine months ended September 30, 2003 and 2002
(Dollars in thousands)
(Unaudited) 2003 2002
OPERATING ACTIVITIES
Net income $ 3,457 $ 2,727
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for credit losses --- 954
Depreciation and amortization 306 324
Stock dividends received (38) (174)
Proceeds of loans held for sale 286 ---
(Gain) on sales of loans (30) ---
(Gain) on sale of investment securities (4) ---
(Gain) on sale of premises and equipment (2) ---
(Gain) on sale of foreclosed real estate (33) (160)
(Increase) decrease in accrued interest receivable 31 (141)
Decrease in accrued interest payable (83) (92)
Write-down of foreclosed real estate 173 402
Other (494) (1,735)
------- -------
Net cash provided by operating activities 3,569 3,124
======= =======
INVESTING ACTIVITIES
Net (increase) decrease in federal funds sold (5,590) 2,905
Increase in interest bearing
deposits with banks (6,940) (2,353)
Purchase of securities held to maturity (1,654) (7,967)
Purchases of securities available for sale (18,467) (32,024)
Proceeds from maturities of securities held to maturity 3,126 2,819
Proceeds from maturities of securities available for sale 8,597 15,515
Proceeds from sales of securities available for sale 2,994 ---
Proceeds from sales of loans 1,795 ---
Net increase in loans (11,007) (7,209)
Proceeds from sales of foreclosed real estate 642 707
Additions to foreclosed real estate (21) (25)
Additions to premises and equipment (167) (181)
Proceeds from sales of premises and equipment 2 ---
------- -------
Net cash provided by (used in) investing activities (26,690) (26,794)
======= =======
FINANCING ACTIVITIES
Net increase in deposits 27,500 15,926
Net decrease in short-term borrowings (1,800) ---
Proceeds from issuance of long-term debt 3,500 11,000
Payment of dividends (3,392) (3,289)
------- -------
Net cash provided by financing activities 25,808 23,637
======= =======
Net increase (decrease) in cash and due from banks 2,687 (33)
======= =======
CASH AND DUE FROM BANKS
Beginning of period 8,473 10,231
End of period $11,160 $10,198
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for:
Interest $ 2,702 $ 3,090
Income Taxes 1,728 1,040
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES
Foreclosed real estate acquired in settlement of loans $(1,127) $ (834)
Financed sale of foreclosed real estate 154 628
Change in fair value of securities available
for sale, net of tax $ (183) $ 277
-5-
Condensed Consolidated Statements of Shareholders' Equity
Nine months ended September 30, 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 2,727 2,727
Change in fair value of 277 277
securities available for sale, net
Comprehensive income 3,004
------- ------- ------- ------- -------
Balance September 30, 2002 $ 2,492 $ 9,524 $13,817 $ 685 $26,518
Balance December 31, 2002 $ 2,513 $ 9,839 $11,614 $ 717 $24,683
Other comprehensive income:
Net income 3,457 3,457
Change in fair value of
securities available for sale, net (183) (183)
Comprehensive income 3,274
------- ------- ------- ------- -------
Balance September 30, 2003 $ 2,513 $ 9,839 $15,071 $ 534 $27,957
-6-
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, 2003,
are not necessarily indicative of the results anticipated for the year ending
December 31, 2003. Certain information and footnote disclosures included in the
Company's financial statements for the year ended December 31, 2002, have been
condensed or omitted from this report. Accordingly, these statements should be
read with the financial statements and notes thereto included in the Company's
December 31, 2002 Annual Report on Form 10-K.
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.
-7-
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 GROSS GROSS FAIR
COST UNREALIZED UNREALIZED VALUE
GAINS (LOSSES)
September 30, 2003
U.S. Government Securities $ 3,484 $ 27 --- $ 3,511
State and Municipal Securities 5,317 65 (31) 5,351
------- ------- ------- -------
TOTAL $ 8,801 $ 92 $ (31) $ 8,862
======= ======= ======= =======
SECURITIES AVAILABLE FOR AMORTIZED GROSS GROSS FAIR
SALE COST UNREALIZED UNREALIZED VALUE
GAINS (LOSSES)
September 30, 2003
U.S. Government Securities $19,872 $ 250 (93) $20,029
State and Municipal Securities 13,390 623 (90) 13,923
Corporate Securities 4,079 175 --- 4,254
Mutual Funds 20,441 2 (58) 20,385
------- ------- ------- -------
TOTAL $57,782 $ 1,050 $ (241) $58,591
======= ======= ======= =======
3. ALLOWANCE FOR CREDIT LOSSES
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2003 2002 2003 2002
------ ------ ------ -------
Balance at beginning of period $2,350 $2,559 $2,473 $2,109
Provision for possible credit losses --- --- --- 954
Charge-offs (16) (31) (141) (554)
Recoveries 19 18 21 37
Net charge-offs 3 (13) (120) (517)
------ ------ ------ -------
Balance at end of period $2,353 $2,546 $2,353 $2,546
Ratio of net charge-offs to
average loans outstanding .00% .23% .07% .29%
-8-
4. COMPUTATION OF BASIC EARNINGS PER SHARE
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2003 2002 2003 2002
------ ------ ------ ------
Net Income $1,194,000 $1,073,000 $3,457,000 $2,727,000
Shares Outstanding,
Beginning of Period 2,512,669 2,491,629 2,512,659 2,491,629
Average Shares Outstanding 2,512,669 2,491,629 2,512,665 2,491,629
Basic Earnings Per Share $ .48 $ .43 $ 1.38 $ 1.09
5. COMPUTATION OF DILUTED EARNINGS PER SHARE
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2003 2002 2003 2002
------ ------ ------ ------
Net Income $1,194,000 $1,073,000 $3,457,000 $2,727,000
Average Shares Outstanding 2,512,669 2,491,629 2,512,665 2,491,629
Effect of dilutive securities 51,348 17,564 41,120 20,231
Average Shares Outstanding and
Assumed conversion of dilutive
Stock options 2,564,017 2,509,193 2,553,785 2,511,860
Diluted Earnings Per Share $ .47 $ .43 $ 1.35 $ 1.09
6. EQUITY COMPENSATION PLANS
At September 30, 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2003 2002 2003 2002
------ ------ ------ ------
Net Income, as reported $1,194,000 $1,073,000 $3,457,000 $2,727,000
Less total stock-based compensation
expense determined under fair value
method for all qualifying awards 22,000 14,000 66,000 41,000
Pro forma net income 1,172,000 1,059,000 3,391,000 2,686,000
Earnings per Share
Basic:
As reported .48 .43 1.38 1.09
Pro forma .47 .43 1.35 1.08
Diluted:
As reported .47 .43 1.35 1.09
Pro forma .46 .42 1.33 1.07
-9-
7. RECENT ACCOUNTING PRONOUNCEMENTS
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities." This interpretation requires a variable interest
entity to be consolidated by the primary beneficiary of that entity. The
consolidation requirements of this interpretation apply immediately to variable
interest entities created after January 31, 2003, and apply to existing entities
for the first fiscal year or interim period beginning after June 15, 2003.
Certain disclosure requirements apply in all financial statements issued after
January 31, 2003, regardless of when the variable interest entity was
established. This Statement did not have a material impact on the Company's
financial condition or results of operations.
In May 2003, the FASB issued Statement No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity". This
Statement establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances). Such
instruments may have been previously classified as equity. This Statement is
effective for financial instruments entered into or modified after May 31, 2003,
and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. The Company does not anticipate that adoption of
this standard will have a significant effect on its reported equity.
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. our recently announced acquisition of BNW Bancorp may not be
completed if conditions to the merger are not satisfied; if the merger is
completed, it may be dilutive to earnings per share if we do not realize
expected cost savings or successfully integrate BNW Bancorp into the
Company in a timely manner and without significant customer or employee
disruptions or losses.
-10-
4. our growth strategy, particularly if accomplished through
acquisitions, may not be successful if we fail to accurately assess market
opportunities, asset quality, anticipated cost savings, and transaction
costs, or experience significant difficulty integrating acquired
businesses or assets.
5. 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; and
6. decreases in real estate prices may reduce the value of our
securities or some loans.
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.
RESULTS OF OPERATIONS
Net income. For the nine months ended September 30, 2003, Pacific's net income
was $3,457,000 compared to $2,727,000 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. Net income for the three months ended September 30,
2003 was $1,194,000, which compared to $1,073,000 during the same period in
2002. The increase was attributable to a decrease in interest expense, an
increase in mortgage loan origination fees, gain on sale of loans and gain on
sale of foreclosed real estate during the quarter ended September 30, 2003.
Net interest income. Net interest income for the three and nine months ended
September 30, 2003 increased $262,000, and $522,000 respectively, compared to
the same period in 2002. This is due primarily to increased interest income on
loans and investment income, and decreased interest expense.
-11-
Interest income for the three months ended September 30, 2003, increased
$52,000, or 1.3%, compared to the comparable period in 2002, and for the first
nine months of 2003 increased $143,000, or 1.2%, from the same period in 2002.
The increases are attributable primarily to increased investment securities and
increased loan balances compared to the 2002 periods. Average total loans
outstanding for the nine months ended September 30, 2003, and September 30,
2002, were $185,911,000, and $179,833,000, respectively, or an increase of 3.4%
in 2003 over 2002.
Interest expense for the three months ended September 30, 2003 decreased
$222,000, or 21.2%, compared to the same period in 2002, and decreased $379,000,
or 12.6%, for the nine months ended September 30, 2003 over the comparable
period in 2002. Deposits have continued to re-price downward during 2003
compared to 2002 as a result of lower market rates. Average interest-bearing
deposit balances for the nine months ended September 30, 2003 and September 30,
2002 were $196,058,000 and $181,987,000, respectively, representing an increase
of 7.7% compared to last year's period. The increase is very evenly spread among
all of the company's deposit products. Average long term borrowings for the nine
months ended September 30, 2003 were $13,926,000 compared to $5,130,000 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 adequacy of the allowance is
conducted quarterly and is reviewed by the Board of Directors. Based on this
analysis, management considers the allowance for credit losses to be adequate at
September 30, 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 10-K for the year ended December 31, 2002.
During the three months ended September 30, 2003, no provision was provided for
possible credit losses, and no provision was provided in the same period in
2002. For the nine months
-12-
ended September 30, 2003, no provision was provided for possible credit losses,
compared to $954,000 for the comparable period in 2002. For the nine months
ended September 30, 2003, net charge-offs were $120,000, compared to net
charge-offs of $517,000 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 September 30, 2003 are primarily related to
commercial loan write downs of $119,700.
At September 30, 2003, the allowance for credit losses stood at $2,353,000
compared to $2,473,000 at December 31, 2002, and $2,546,000 at September 30,
2002. The ratio of the allowance to total loans outstanding was 1.22%, 1.33% and
1.40%, respectively, at September 30, 2003, December 31, 2002, and September 30,
2002.
Non-performing assets and foreclosed real estate. Non-performing assets totaled
$1,494,000 at September 30, 2003. This represents .77% of total loans, compared
to $2,552,000, or 1.38%, at December 31, 2002, and $1,535,000, or .97%, at
September 30, 2002. Non-accrual loans at September 30, 2003 totaled $596,000 of
which $463,000 are secured by real estate. The decrease of $1,058,000 compared
to December 31, 2002, is primarily due to the transfer of a motel property to
foreclosed real estate that totaled $961,000. 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 and a motel property that totals $784,000.
The Company has been successful during the recent months in selling individual
properties with minimal impact to net income.
ANALYSIS OF NON-PERFORMING ASSETS
SEPTEMBER 30 DECEMBER 31 SEPTEMBER 30
(in thousands) 2003 2002 2002
Accruing loans past due 90 days or more $ --- $ 2 $ 1
Non-accrual loans 596 1,864 812
Foreclosed real estate 898 686 722
------ ------ ------
TOTAL $1,494 $2,552 $1,535
====== ====== ======
Non-interest income and expense. Non-interest income for the three month and
nine month periods ended September 30, 2003 increased $59,000 and decreased
$195,000, respectively, compared to the same periods in 2002. Service charges on
deposit accounts decreased $44,000 and $44,000 during the three and nine months
ended September 30, 2003, respectively compared to the same periods in 2002. The
decrease is mostly attributable to changes in pricing on commercial checking
accounts. Mortgage loan origination fees increased $48,000 and $89,000
respectively for the three and nine months periods ended September 30, 2003
compared to 2002, due to increased refinancing activity as customers take
advantage of low mortgage interest rates. For the three month period ended
September 30, 2003 the Company recorded a gain on sale of loans totaling $30,000
and a gain on sale of foreclosed real estate of $38,000 compared to zero and
$19,000 respectively for the same period in 2002. For the nine months ended
September 30,
-13-
2003 gain on the sale of foreclosed real estate was $33,000 compared to a gain
of $160,000 for the same period in 2002. Other operating income for the three
and nine months ended September 30, 2003 increased $9,000 and decreased
$147,000, respectively, compared to the same period in 2002, primarily due to a
decrease in income from operations on foreclosed real estate.
Non-interest expense for the three and nine month period ended September 30,
2003 increased $155,000 and $304,000, respectively, compared to the same period
in 2002. For the three-month period in 2003, salaries and benefits increased
$118,000, primarily due to an increase in the number of employees and higher
bonus accruals. Also, occupancy expenses decreased $6,000, while other expenses
increased $43,000, compared to the same period in 2002. For the nine months
ended September 30, 2003, salaries and benefits increased $409,000, occupancy
expense decreased $12,000 and other expense decreased $93,000 due to a refund of
business and occupation tax and decreased foreclosed real estate expenses
compared to the same period in 2002.
Income taxes. The federal income tax provision for the nine months ended
September 30, 2003 was $1,415,000, an increase of $247,000 compared to the same
period in 2002 based upon increased income for the Company.
FINANCIAL CONDITION
Assets. Total assets were $297,215,000 at September 30, 2003, an increase of
$28,681,000, or 10.7%, over year-end 2002. The majority of the increase is in
the Company's cash and short term investment vehicles. Loans were $193,669,000
at September 30, 2003, an increase of $8,165,000, or 4.4%, over year-end 2002.
Part of the increase is attributable to loans originated in the Gearhart loan
production office that commenced operation August 1, 2003. As of September 30,
2003, the Gearhart office has originated loans totaling $5,990,000. Total
deposits were $252,754,000 at September 30, 2003, an increase of $27,500,000, or
12.2%, compared to December 31, 2002. The increase in deposits over December 31,
2002 is cyclical in nature from tourist activity. Additionally, the Company
sponsored a deposit campaign to attract new customers.
Loans. Loan detail by category as of September 30, 2003 and December 31, 2002
follows:
September 30, December 31,
2003 2002
Commercial and industrial $ 54,978 $ 61,236
Agricultural 4,890 8,558
Real estate mortgage 118,377 101,151
Real estate construction 9,749 9,697
Installment 4,309 4,114
Credit cards and other 1,200 1,034
-------- --------
Total Loans 193,669 185,790
Allowance for credit losses (2,353) (2,473)
-------- --------
Net Loans $191,316 $183,317
======== ========
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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 $27,957,000 at September
30, 2003, an increase of $3,274,000, or 13.3%, compared to December 31, 2002.
The increase was due to net income and a decrease in the fair value of
securities available for sale. Book value per share increased to $11.13 at
September 30, 2003, compared to $9.82 at December 31, 2002. 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 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
September 30, 2003, and believes that there has been no material change since
December 31, 2002.
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ITEM 4. CONTROLS AND PROCEDURES
Our chief executive officer ("CEO") and chief financial officer ("CFO"), after
evaluating the effectiveness of our disclosure controls and procedures (as
defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of
1934 (the "Exchange Act")) as of the end of the period covered by this quarterly
report, have concluded, based on such evaluation, that the Company's disclosure
controls and procedures are effective in timely alerting them to material
information relating to the Company, including its consolidated subsidiaries,
required to be included in its reports filed or submitted under the Exchange
Act. No change in the Company's internal control over financial reporting
occurred during our last fiscal quarter that has materially affected or is
reasonably likely to materially affect, the Company's internal control over
financial reporting.
PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION
On October 22, 2003, the Company and BNW Bancorp, Inc. ("BNW"), the
holding company for Bank NorthWest headquartered in Bellingham, Washington,
signed an Agreement and Plan of Merger (the "Agreement"), under which BNW will
merge into the Company. In addition, Bank NorthWest will merge into the
Company's banking subsidiary, the Bank of the Pacific.
In the merger, the Company will issue 0.85 shares of the Company's common
stock in exchange for each share of BNW common stock surrendered in the
transaction. Consummation of the acquisition is subject to several conditions,
including receipt of applicable regulatory approvals and approval by the
shareholders of BNW and Pacific.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit No. Exhibit
2.1 Agreement and Plan of Merger between the Company and BNW
Bancorp, Inc. dated as of October 22, 2003. Incorporated by
reference to Exhibit 99.1 to the Company's current report on
Form 8-K dated October 22, 2003.
31.1 Certification of CEO under Section 302 of the Sarbanes-Oxley
Act.
31.2 Certification of CFO under Section 302 of the Sarbanes-Oxley
Act.
32 Certifications of CEO and CFO under Section 906 of the
Sarbanes-Oxley Act.
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(b) Reports on Form 8-K:
None.
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 12, 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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