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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
---------------
(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, 2005
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 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 April 30, 2005
-------------- -----------------------------
Common Stock, par value $1.00 per share 6,421,396 shares
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-1-
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION 3
ITEM 1. FINANCIAL STATEMENTS 3
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, 2005 AND DECEMBER 31, 2004 3
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED MARCH 31, 2005 AND 2004 4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2005 AND 2004 5
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS'
EQUITY THREE MONTH PERIODS ENDED MARCH 31, 2005 AND 2004 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 15
ITEM 1. LEGAL PROCEEDINGS 15
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF 15
PROCEEDS
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 15
ITEM 5. OTHER INFORMATION 16
ITEM 6. EXHIBITS 15
SIGNATURES 15
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PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
PACIFIC FINANCIAL CORPORATION
Condensed Consolidated Balance Sheets
(Dollars in thousands)
March 31, December 31,
2005 2004
(Unaudited)
Assets
Cash and due from banks $ 13,486 $ 10,213
Interest bearing balances with banks 8,666 5,460
Federal funds sold 12,485 6,034
Investment securities available for sale 34,843 35,780
Investment securities held-to-maturity 7,049 7,210
Federal Home Loan Bank stock, at cost 1,850 1,850
Loans held for sale 7,923 1,852
Loans 340,545 345,907
Allowance for credit losses 4,544 4,236
-------- --------
Loans, net 336,001 341,671
Premises and equipment 6,861 6,833
Foreclosed real estate 40 40
Accrued interest receivable 1,929 1,873
Cash surrender value of life insurance 9,127 9,037
Goodwill 11,282 11,282
Other intangible assets 851 887
Other assets 1,419 1,769
-------- --------
Total assets $453,812 $441,791
Liabilities and Shareholders' Equity
Deposits:
Non-interest bearing $ 76,305 $ 71,711
Interest bearing 305,480 291,790
-------- --------
Total deposits 381,785 363,501
Accrued interest payable 391 385
Secured borrowings 3,577 3,733
Long-term borrowings 19,500 21,500
Other liabilities 2,264 7,369
-------- --------
Total liabilities 407,517 396,488
Shareholders' Equity
Common Stock (par value $1); 25,000,000 shares authorized; 6,421 6,421
6,421,396 shares issued and outstanding at March 31, 2005
and December 31, 2004
Additional paid-in capital 25,003 25,003
Retained earnings 15,035 13,746
Accumulated other comprehensive income (164) 133
-------- --------
Total shareholders' equity 46,295 45,303
Total liabilities and shareholders' equity $453,812 $441,791
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PACIFIC FINANCIAL CORPORATION
Condensed Consolidated Statements of Income
Three months ended March 31, 2005 and 2004
(Dollars in thousands, except per share)
(Unaudited)
2005 2004
Interest and dividend income
Loans $6,124 $4,156
Investment securities and FHLB dividends 450 666
Deposits with banks and federal funds sold 72 15
------ ------
Total interest and dividend income 6,646 4,837
Interest Expense
Deposits 1,304 748
Other borrowings 215 131
------ ------
Total interest expense 1,519 879
Net Interest Income 5,127 3,958
Provision for credit losses 300 70
------ ------
Net interest income after provision for credit losses 4,827 3,888
Non-interest Income
Service charges on deposits 321 288
Gain on sales of loans 279 69
Gain on sale of foreclosed real estate -- 35
Gain on sale of investments available for sale 9 3
Gain on sale of premises and equipment 80 --
Other operating income 197 176
------ ------
Total non-interest income 886 571
Non-interest Expense
Salaries and employee benefits 2,414 1,625
Occupancy and equipment 467 302
Other 998 679
------ ------
Total non-interest expense 3,879 2,606
Income before income taxes 1,834 1,853
Provision for income taxes 545 479
------ ------
Net Income $1,289 $1,374
Comprehensive Income $ 992 $1,673
Earnings per common share:
Basic $ .20 $ .25
Diluted .20 .25
Average shares outstanding:
Basic 6,421,396 5,478,950
Diluted 6,525,848 5,665,732
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PACIFIC FINANCIAL CORPORATION
Condensed Consolidated Statements of Cash Flows
Three months ended March 31, 2005 and 2004
(Dollars in thousands)
(Unaudited)
2005 2004
---- ----
OPERATING ACTIVITIES
Net income $ 1,289 $ 1,374
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Provision for credit losses 300 70
Depreciation and amortization 268 120
Deferred income tax (benefit) -- (292)
Stock dividends received -- (16)
Origination of loans held for sale (25,426) (5,929)
Proceeds of loans held for sale 19,634 5,313
Gain on sales of loans (279) (69)
Gain on sale of investment securities (9) (3)
Gain on sale of foreclosed real estate -- (35)
Gain on sale of premises and equipment (80) --
Increase in accrued interest receivable (56) (232)
Increase (decrease) in accrued interest payable 6 (19)
Other (87) (185)
------- -------
Net cash provided by (used in) operating activities (4,440) 97
INVESTING ACTIVITIES
Net (increase) decrease in federal funds (6,451) 5,000
(Increase) decrease in interest bearing deposits with banks (3,206) 15,543
Purchase of securities held to maturity -- (344)
Purchase of securities available for sale (2,715) (2,910)
Proceeds from maturities of investments held to maturity 157 381
Proceeds from sales of securities available for sale 1,100 19,060
Proceeds from maturities of securities available for sale 2,076 2,498
Net (increase) decrease in loans 5,370 (11,904)
Proceeds from sales of foreclosed real estate -- 93
Additions to premises and equipment (226) (327)
Proceeds from sales of premises and equipment 104 --
Purchase of bank owned life insurance -- (2,500)
Acquisition, net of cash received -- 3,146
------- -------
Net cash provided by (used in) investing activities (3,791) 27,736
FINANCING ACTIVITIES
Net increase (decrease) in deposits 18,284 (10,592)
Net decrease in short-term borrowings -- (9,040)
Net decrease in secured borrowings (156) - -
Repayments of long-term borrowings (2,000) (2,000)
Stock options exercised -- 206
Payment of cash dividends (4,624) (3,530)
------- -------
Net cash provided by (used in) financing activities 11,504 (24,956)
Net increase in cash and due from banks 3,273 2,877
CASH AND DUE FROM BANKS
Beginning of period 10,213 9,280
End of period $13,486 $12,157
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for:
Interest $ 1,513 $ 828
Income Taxes 375 72
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES
Foreclosed real estate acquired in settlement of loans $ -- $ (43)
Change in fair value of securities available
for sale, net of tax (297) 299
Common stock issued upon business combination -- 17,282
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PACIFIC FINANCIAL CORPORATION
Condensed Consolidated Statements of Shareholders' Equity
Three months ended March 31, 2005 and 2004
(Dollars in thousands)
(Unaudited)
ACCUMULATED
OTHER
ADDITIONAL COMPREHENSIVE
COMMON PAID-IN RETAINED INCOME
STOCK CAPITAL EARNINGS (LOSS) TOTAL
Balance December 31, 2003 $5,043 $7,484 $12,663 $460 $25,650
Issuance of common stock 1,272 16,641 17,913
Stock options exercised 30 176 206
Tax benefit from exercise of options 9 9
Other comprehensive income:
Net income 1,374 1,374
Change in fair value of
securities available for sale, net 299 299
Comprehensive income 1,673
------ ------- ------- ---- ------
Balance March 31, 2004 $6,345 $24,310 $14,037 $759 $45,451
Balance December 31, 2004 $6,421 $25,003 $13,746 $133 $45,303
Other comprehensive income:
Net income 1,289 1,289
Change in fair value of
securities available for sale, net (297) (297)
Comprehensive income 992
------ ------- ------- ---- ------
Balance March 31, 2005 $6,421 $25,003 $15,035 ($164) $46,295
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PACIFIC FINANCIAL CORPORATION
Notes to Condensed Consolidated Financial Statements
Three months ended March 31, 2005 and 2004
(unaudited)
NOTE 1. Basis of Presentation
The accompanying unaudited consolidated 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, 2005, are
not necessarily indicative of the results anticipated for the year ending
December 31, 2005. Certain information and footnote disclosures included in the
Company's consolidated financial statements for the year ended December 31,
2004, 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, 2004 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.
NOTE 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 UNREALIZED FAIR
COST GAINS LOSSES VALUE
March 31, 2005
U.S. Government Securities $ 1,571 $ 16 $ -- $ 1,587
State and Municipal Securities 5,478 32 47 5,463
------- ---- ---- -------
TOTAL $ 7,049 $ 48 $ 47 $ 7,050
SECURITIES AVAILABLE FOR SALE AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
March 31, 2005
U.S. Government Securities $14,910 $ 63 $292 $14,681
State and Municipal Securities 13,064 185 99 13,150
Corporate Securities 4,089 21 39 $ 4,071
Mutual Funds 3,030 -- 89 2,941
------- ---- ---- -------
TOTAL $35,093 $269 $519 $34,843
For all the above investment securities, the unrealized losses are generally;
due to changes in interest rates and, as such, are considered to be temporary by
management. The Company has evaluated the securities shown above and anticipates
full recovery of amortized cost with respect to these securities at maturity or
sooner in the event of a more favorable market interest rate environment.
Additionally, the contractual cash flow of mortgage backed securities are
guaranteed by an agency of the U.S. Government.
-7-
NOTE 3. Allowance for Credit Losses
THREE MONTHS ENDED TWELVE MONTHS
MARCH 31, ENDED DECEMBER 31,
2005 2004 2004
Balance at beginning of period $4,236 $2,238 $2,238
BNW Bancorp, Inc. acquisition -- 1,172 1,172
Provision for possible credit losses 300 70 970
Charge-offs -- (19) (275)
Recoveries 8 5 131
Net (charge-offs) recoveries 8 (14) (144)
------ ------ ------
Balance at end of period $4,544 $3,466 $4,236
Ratio of net charge-offs to
average loans outstanding .00% .01% .04%
NOTE 4. Computation of Basic Earnings per Share:
THREE MONTHS ENDED
MARCH 31,
2005 2004
Net Income $1,289,000 $1,374,000
Average Shares Outstanding 6,421,396 5,478,950
Basic Earnings Per Share $.20 $.25
NOTE 5. Computation of Diluted Earnings Per Share:
THREE MONTHS ENDED
MARCH 31,
2005 2004
Net Income $1,289,000 $1,374,000
Average Shares Outstanding 6,421,396 5,478,950
Effect of dilutive securities 104,452 186,782
Average Shares Outstanding and
Assumed conversion of dilutive
Stock options 6,525,848 5,665,732
Diluted Earnings Per Share $0.20 $0.25
-8-
NOTE 6. Equity Compensation Plans
At March 31, 2005, 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,
2005 2004
Net Income, as reported $1,289,000 $1,374,000
Less total stock-based compensation
expense determined under fair value
method for all qualifying awards, net of 54,000 25,000
tax
Pro forma net income 1,235,000 1,349,000
Earnings per Share
Basic:
As reported $.20 $.25
Pro forma .19 .25
Diluted:
As reported .20 .25
Pro forma .19 .24
NOTE 7. Acquisition
On February 27, 2004, the Company completed the acquisition of BNW Bancorp, Inc.
Each share of BNW Bancorp, Inc. was exchanged for 0.85 shares of the Company's
common stock resulting in the issuance of 1,271,904 new shares. The acquisition
was accounted for using the purchase method of accounting and, accordingly, the
assets and liabilities of BNW Bancorp, Inc. were recorded at their respective
fair value. Goodwill, the excess of the purchase price over the net fair value
of the assets and liabilities acquired, was recorded at $11,282,000. As part of
the accounting for the acquisition, the Company recorded a core deposit
identifiable intangible asset of $993,000.
The Company will follow the provisions of SFAS No. 142, Goodwill and Other
Intangible Assets. SFAS No. 142 provides that goodwill is no longer amortized
and the value of an identifiable intangible asset is amortized over its useful
life, unless the asset is determined to have an indefinite life. The Company
will review the recorded value of goodwill on an annual basis for impairment.
The annual test for impairment will be a two step process. The first step will
be to compare the current value of BNW Bancorp, Inc. with its fair value on the
purchase date. If the current value exceeds the purchase value, goodwill will
not be considered to be impaired and the test is completed. If the current value
is less than purchase value, the Company will perform an analysis of goodwill
and appropriate impairment losses will be taken at that time.
-9-
Although management has not performed a formal annual test for goodwill
impairment, it is confident current fair value of BNW Bancorp, Inc exceeds the
value as of the purchase date on February 27, 2004.
The core deposit intangible recorded as part of the acquisition has an estimated
life of seven years. Amortization expense was $36,000 and $106,000 for the three
months ended March 31, 2005 and the year ended December 31, 2004, respectively.
Estimated amortization expense will be approximately $142,000 for the years
ended December 31, 2005 through 2010 and $35,000 for the year ended December 31,
2011.
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, retain key employees, and/or maintain our
interest margins and fee income;
2. changes in the interest rate environment may reduce margins or
decrease the value of our securities;
3. our acquisition of BNW Bancorp may be dilutive to earnings per
share if we do not realize expected cost savings or successfully operate
the business of BNW Bancorp without significant customer or employee
disruptions or losses;
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 regions in which we do business, may be less favorable than expected,
resulting in, among other things, a deterioration in credit quality or a
reduced demand for credit; and
6. a lack of liquidity in the market for our common stock may make
it difficult or impossible for you to liquidate your investment in our
stock or lead to distortions in the market price of our stock.
Our management believes the forward-looking statements in this report 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
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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, 2005, Pacific's net income was
$1,289,000 compared to $1,374,000 for the same period in 2004. The most
significant factor contributing to the decrease was the provision for credit
losses of $300,000 for the period ended March 31, 2005 compared to $70,000
during the same period in 2004. Additionally, an increase in staffing, increased
director expenses, data processing expense and professional fees increased
non-interest expense for the quarter ended March 31, 2005 compared to the same
period in 2004.
Net interest income. Net interest income for the three months ended March 31,
2005 increased $1,169,000, or 29.5%, compared to the same periods in 2004. This
is due primarily to increased interest income from loans and the effect of the
BNW acquisition at the end of February 2004.
Interest income for the three months ended March 31, 2005, increased $1,809,000,
or 37.4%, compared to the same period in 2004. Average total loans outstanding
for the three months ended March 31, 2005, and March 31, 2004, were
$345,970,000, and $242,892,000, respectively, or an increase of 42.4% in 2005
over 2004. This is due primarily to the BNW acquisition that closed February 27,
2004.
Interest expense for the three months ended March 31, 2005 increased $640,000,
or 72.8%, compared to the same period in 2004. The increase is primarily
attributable to increased deposit balances and increased expense of long term
borrowings, as well as higher interest rates. Average interest-bearing deposit
balances for the three months ended March 31, 2005 and March 31, 2004 were
$370,892,000 and $234,855,000, respectively, representing an increase of 57.9%
compared to last year's period. The increase is attributable primarily to the
BNW acquisition that closed February 27, 2004.
Average secured borrowings for the three months ended March 31, 2005 and March
31, 2004 were $3,655,000 and none, respectively, an increase of 100.0% over the
2004 period. The secured borrowings represent borrowing collateralized by
participation interests in loans originated by the Company. These borrowings are
repaid as payments are made on the underlying loans, bearing interest rates
ranging from 5.75% to 8.5%. Average long term borrowings for the three months
ended March 31, 2005 were $20,098,000 compared to $13,919,000 for the same
period in 2004.
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
-11-
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 March 31,
2005.
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, 2004.
During the three months ended March 31, 2005, a provision of $300,000 was
provided for possible credit losses, compared to $70,000 for the same period in
2004. For the three months ended March 31, 2005, net recoveries were $8,000,
compared to net charge-offs of $14,000 during the same period in 2004, and
compared to $144,000 in net charge-offs during the twelve months ended December
31, 2004.
At March 31, 2005, the allowance for credit losses stood at $4,544,000 compared
to $4,236,000 at December 31, 2004, and $3,466,000 at March 31, 2004. This
increase was attributable to the additions in loan loss provision that was
allocated to the allowance for credit losses as a result of continued growth in
the loan portfolio. The ratio of the allowance to total loans outstanding was
1.33%, 1.23% and 1.08%, respectively, at March 31, 2005, December 31, 2004, and
March 31, 2004.
Non-performing assets and foreclosed real estate owned. Non-performing assets
totaled $7,746,000 at March 31, 2005. This represents 2.22% of total loans,
compared to $510,000 or .15% at December 31, 2004, and $1,633,000 or .51% at
March 31, 2004. Non-accrual loans at March 31, 2005 totaled $7,706,000. This
relates to one borrower involving forest products. Although the borrower is
continuing operations, the deteriorating financial condition of the borrower
creates the potential the Company may not be able to collect all principal and
interest according to the terms of the loan. Additionally, $3,518,000 of the
non-accrual loans outstanding are guaranteed by the United States Department of
Agriculture. Based on current analysis, management has made provisions in the
loan loss reserves for potential losses associated with non-accrual loans.
Foreclosed real estate consists of two properties secured by real estate with no
individual material balances.
ANALYSIS OF NON-PERFORMING ASSETS
MARCH 31 DECEMBER 31 MARCH 31
(in thousands) 2005 2004 2004
Accruing loans past due 90 days or more $ 6 $ -- $ 3
Non-accrual loans 7,706 470 1,547
Foreclosed real estate 40 40 83
------ ---- ------
TOTAL $7,746 $510 $1,633
Non-interest income and expense. Non-interest income for the three months ended
March 31, 2005 increased $315,000, compared to the same period in 2004. The
primary reasons for the increases were additional service charge income and gain
on sale of loans. Service charges on deposit accounts increased $33,000,
compared to the three months ended March 31, 2004. Gain on sale of loans totaled
$279,000 for the three months ended March 31, 2005 and totaled $69,000 for the
same three month period in 2004. Prior to 2004, the Company did not sell loans
into the secondary market. However, a real estate
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mortgage department was included with the BNW acquisition, resulting in revenues
relating to gain on sale of loans. Commitment to sell and sale price is
established at the time of origination of loans to limit any potential price
risk.
Non-interest expense for the three months ended March 31, 2005 increased
$1,273,000, or 48.9%, compared to the same period in 2004. The BNW acquisition
was the major contributing factor to increased non-interest expense due to the
increase of full time equivalent employees, the addition of five branches, and
other operating expenses.
Income taxes. The federal income tax provision for the three months ended March
31, 2005 and 2004 was $545,000, and $479,000, respectively, an increase of
$66,000. The effective tax rate for the three months ended March 31, 2005 was
29.7%.
Financial Condition. Total assets were $455,537,000 at March 31, 2005, an
increase of $13,746,000, or 3.1%, over year-end 2004. Loans, including loans
held for sale, were $348,468,000 at March 31, 2005, an increase of $709,000,
over year-end 2004. Total deposits were $383,510,000 at March 31, 2005, an
increase of $20,009,000, or 5.50%, compared to December 31, 2004.
Loans. Loan detail by category, including loans held for sale, as of March 31,
2005 and December 31, 2004 follows:
March 31, December 31,
2005 2004
Commercial and industrial $ 89,426 $ 87,985
Agricultural 21,100 23,065
Real estate mortgage 173,242 175,730
Real estate construction 53,873 49,347
Installment 9,404 9,934
Credit cards and other 1,423 1,698
-------- --------
Total Loans 348,468 347,759
Allowance for credit losses (4,544) (4,236)
-------- --------
Net Loans $343,924 $343,523
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 generally 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 $46,295,000 at March 31,
2005, an increase of $992,000, or 2.2%, compared to December 31, 2004. Tangible
book value per share was $5.32 at March 31, 2005 compared to $5.16 at December
31, 2004. Tangible book value is calculated by dividing total equity capital
minus goodwill, 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. Also, 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, 2005, and
believes that there has been no material change since December 31, 2004.
ITEM 4. CONTROLS AND PROCEDURES
The Company's 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 ("Exchange Act") is recorded, processed,
summarized, and reported on a timely basis. Our management has evaluated, with
the participation and under the supervision of our chief executive officer (CEO)
and chief financial officer (CFO), the effectiveness of our disclosure controls
and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act)
as of the end of the period covered by this report. Based on this evaluation,
our CEO and CFO have concluded that, as of such date, the Company's disclosure
controls and procedures are effective in ensuring that information relating to
the Company, including its consolidated subsidiaries, required to be disclosed
in reports that it files under the Exchange Act is (1) recorded, processed,
summarized and reported within the time periods specified in the SEC's rules and
forms, and (2) accumulated and communicated to our management, including our CEO
and CFO, as appropriate to allow timely decisions regarding required
disclosures.
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.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Pacific held its Annual Meeting of Shareholders on April 20, 2005, at
which the shareholders of the Company voted on and approved the following:
1. The election of four Class C directors (John R. Ferlin, Duane E.
Hagstrom, Randy W. Rognlin and Stewart L. Thomas) for a three year
term.
The voting with respect to each of these matters was as follows:
Election of Directors
NAME FOR WITHHOLD
John R. Ferlin 2,254,434 28,425
Duane E. Hagstrom 2,258,929 23,930
Randy W. Rognlin 2,209,626 73,233
Stewart L. Thomas 2,259,009 23,850
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS
See Exhibit Index immediately following signatures below.
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 9, 2005 By: /s/ Dennis A. Long
-------------------
Dennis A. Long
President
By: /s/ Denise Portmann
-------------------
Denise Portmann, Treasurer
(Principal Financial and
Accounting Officer)
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Exhibit Index
EXHIBIT NO. EXHIBIT
- ----------- -------
10.1 Employment Agreement dated April 21, 2005, between the registrant and
Denise Portmann
31.1 Certification of CEO under Rule 13a - 14(a) of the Exchange Act.
31.2 Certification of CFO under Rule 13a - 14(a) of the Exchange Act.
32 Certification of CEO and CFO under 18 U.S.C. Section 1350.
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