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U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

(Mark One)

For the fiscal year ended December 31, 2003

For the transition period from              to             

Commission File Number 000-32385

Pacifica Bancorp, Inc.

(Exact name of registrant as specified in its charter)

Skyline Tower, 10900 NE 4^th Street, Suite 200, Bellevue, WA 98004

(Address of principal executive offices) (Zip Code)

Registrant’s Telephone Number: (425) 637-1188

Securities Registered Pursuant to Section 12(b) of the Act: None

Securities Registered Pursuant to Section 12(g) of the Act:

Common Stock

(Title of class)

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 past 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 if disclosure of delinquent filers in response to Item 405 of Regulation S-K (17 C.F.R. 229.405) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    Yes  ¨    No  x

Indicate by check mark if the registrant is an accelerated filer within the meaning of Rule 12b-2 promulgated under the Securities Exchange Act of 1934.    Yes  ¨    No  x

The aggregate market value of common stock held by non-affiliates of registrant at June 30, 2003 was $13,694,000 based upon the most recent known sale price of the registrant’s common stock. The registrant’s securities are not listed on a national securities exchange nor are sale, bid or ask information recorded by any automated quotation system.

The number of shares of registrant’s common stock outstanding at March 1, 2004 was 3,235,008.

Documents incorporated by reference and parts of Form 10-K into which incorporated:

Registrant’s definitive Proxy Statement Dated March 2, 2004 Part III, except part of Item 10, as indicated. The Personnel Committee Report on Executive Compensation and the Audit Committee Report contained in the Proxy Statement are not incorporated into this Form 10-K.

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SELECTED FINANCIAL DATA

MESSAGE TO OUR SHAREHOLDERS

COMPANY PROFILE

FORM 10-K

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The following table presents certain selected balance sheet and income statement data, as well as certain key financial ratios, for the five full years that the Company has been in operation. Certain income and expense items for 2002 and 2001 have been adjusted to reflect the closure of the Company’s subsidiary, Pacifica Mortgage Company, during 2003. Income and expenses for Pacifica Mortgage Company are reported as “Loss from Discontinued Operations”.

PACIFICA BANCORP, INC.

FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA

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PART I

The following discussion includes “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, (the “Exchange Act”). Forward-looking statements are based on management’s beliefs and assumptions based on currently available information, and we have not undertaken to update these statements except as required by the Exchange Act, and the rules promulgated thereunder. Other than statements of historical fact regarding our financial position, business strategies and management’s plans and objectives for future operations are forward-looking statements. When used in this report, the words “anticipate,” “believe,” “estimate,” “expect,” and “intend” and words or phrases of similar meaning, as they relate to Pacifica or management, are intended to help identify forward-looking statements. Although we believe that management’s expectations as reflected in forward-looking statements are reasonable, we cannot assure readers that those expectations will prove to be correct. Forward-looking statements are subject to various risks and uncertainties that may cause our actual results to differ materially and adversely from our expectations as indicated in the forward-looking statements and these variations may be both material and adverse. These risks and uncertainties include the fact that we are operating under specific regulatory limitations that limit our ability to grow our business and may require us to take measures that reduce our profitability and may adversely impact our financial condition. We also face risks associated with the geographic concentration of our customers, our ability to maintain or expand our market share or net interest margins, and competitive and economic issues that impact our ability to implement our marketing and growth strategies. Further, actual results may be affected by our ability to compete on price and other factors with other financial institutions; customer acceptance of new products and services; the regulatory environment in which we operate; and general trends in the local, regional and national banking industry as those factors relate to our cost of funds and return on assets. In addition, there are risks inherent in the banking industry relating to collectibility of loans and changes in interest rates. Many of these risks, as well as other risks that may have a material adverse impact on our operations and business, are identified in our other filings with the FDIC and those identified from time to time in our filing with the SEC. However, you should be aware that these factors are not an exhaustive list, and you should not assume these are the only factors that may cause our actual results to differ from our expectations. In addition you should note that we do not intend to update any of the forward-looking statements or the uncertainties that may adversely impacted those statements.

ITEM 1. BUSINESS

General

Pacifica Bancorp, Inc. (“Pacifica” or the “Company”) is a bank holding company for its wholly owned subsidiary, Pacifica Bank (the “Bank”). The Company was organized under the laws of the State of Washington in October 2000 and is headquartered in Bellevue, Washington. Effective March 31, 2003, the Company ceased operations of its wholly owned subsidiary Pacifica Mortgage Company (“Pacifica Mortgage” or the “Mortgage Company”).

The Bank commenced banking operations in October 1998. At a special shareholders’ meeting held on December 14, 2000, shareholders of the Bank voted for the Plan and Agreement of Reorganization (the “Plan”) to reorganize the Bank as a wholly-owned subsidiary of a bank holding company, including a two-for-one stock split. Upon the approval of the Federal Reserve Bank of San Francisco and the Washington State Department of Financial Institutions, Division of Banks (the “Department”), the Plan became effective on January 1, 2001 and the Company became the Bank’s parent company. Upon reorganization, the Bank became a wholly-owned subsidiary of the Company and each outstanding whole share of Bank common stock was exchanged for two shares of the Company’s common stock. Financial and operational data for dates and periods ending before the reorganization reflect only the financial information and business operations of the Company. As a wholly-owned subsidiary, Pacifica Mortgage Company was formed on January 18, 2001, and offered a variety of residential loan options to the residents of our service area The Company undertook a major restructuring of Pacifica Mortgage in the third quarter of 2002. The restructuring did not sufficiently improve profitability of the Mortgage Company, and as a result, the Company closed the Mortgage Company effective March 31, 2003, and processed residual transactions throughout the rest of the year. The Company currently provides mortgage services via referrals to correspondent banks to generate fee income and serve our customers efficiently.

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Our Internet website address is http://www.pacificabank.com. Our Securities Exchange Act reports are available free of charge on our Internet website. Our reports can also be obtained through the Securities and Exchange Commission’s (the “SEC”) EDGAR database at http://www.sec.gov. The contents of our Internet website are not incorporated into this report or into any other communication delivered to security holders or furnished to the SEC.

The Bank is a Washington state-chartered commercial bank, the deposits of which are insured by the Federal Deposit Insurance Corporation (the “FDIC”).

The Company offers a full range of commercial banking services primarily to customers in the Bellevue and Seattle, Washington business districts. Pacifica’s marketing strategy and general business plan are similar to strategies that have proven successful in similar situations involving new banks organized in the Pacific Northwest during the last several years. Pacifica targets small to mid-sized businesses, professionals, various Asian communities and companies doing business in Asia for commercial banking services because we believe these groups may be currently under-served by other financial institutions.

Pacifica’s goal is to exceed customer, shareholder and community expectations in dedication, professionalism and innovation. Management constantly reviews our products and services and those of our competitors in order to provide customers more service options and better quality. We successfully launched our Internet online banking service in December 2001, Cash Management service in May 2002, Online Bill Pay service in September 2002, and Visa Debit Card service in October 2003.

The Company opened a branch office in Seattle in December 2001 and management’s assessment is that the opening was well received by the local community. This allows Pacifica to expand our network and better service our customers in Seattle’s industrial and downtown areas as well as the international district. New branches do not generally become profitable for a period of time after opening, and our experience in Seattle has been no exception to this principle. The Seattle Office has made satisfactory progress since its opening and during 2003 achieved its first year of positive earnings.

The Board of Directors and Management developed a Five-Year Strategic Plan (the Strategic Plan) in the second quarter of 2003, which is designed to strengthen the Company’s financial performance and thereby increase shareholder value. As a result of implementing the strategies, we have made solid progress during 2003. We experienced a significant reduction in classified assets, an improvement in overall asset quality, an increase in net interest margin and improved financial results for the year.

During 2003, we have taken the following measures to improve asset quality while increasing earnings and enhancing overall efficiency:

During the second quarter of 2003, we sublet the office space previously occupied by the Mortgage Company and consolidated the Bank’s office space as well, to help reduce occupancy expenses. During the third quarter and fourth quarter of 2003, the Bank borrowed from the Federal Home Loan Bank (FHLB) to effectively fix a portion of the Company’s funding costs for asset/liability management purposes. In addition, the Company obtained a line of credit from a correspondent bank and used a portion of the line to retire its outstanding Series A-1 Perpetual Preferred Stock (the “Perpetual Preferred”) and A-2 Five-Year

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Cumulative Mandatory Redeemable Preferred Stock (the “Limited Life Preferred”) effective December 29, 2003 and September 30, 2003, respectively. Replacing the preferred stock with a lower cost borrowing is expected to significantly reduce the Company’s cost of capital. See additional discussions on borrowings and redemption of Preferred Stock under Management’s Discussion and Analysis of Financial Condition and Results off Operations.

Given our focus on improving asset quality, increasing earnings and enhancing overall efficiency, as well as the requirements and restrictions imposed by the supervisory directive under which we are operating (as discussed beginning at page 5 below), we expect our current asset size to increase only slightly during 2004. Due to the slow loan demand resulting from a still weak economy and our anticipated loan payoffs, we expect our rate of loan growth to continue to be slower than the rates we experienced in the first three years of operations. We also plan to decrease the amount of time certificate deposits and utilize more of the other sources of borrowings to continue to reduce our cost of funds. The Company continues to look at various other ways to increase income and cut operational expenses in order to improve overall efficiency without losing our focus on customer service, regulatory compliance and credit quality.

Pacifica Bancorp, Inc. and Pacifica Bank Board of Directors and Officers

See inside cover of the annual report.

Market Area

The primary market area from which we attract the majority of our customers is King County, Washington. Pacifica has its main office in the central business district of Bellevue, Washington, located approximately 10 miles east of Seattle, with a branch office in downtown Seattle. We also attract customers from the greater Bellevue area, the greater Seattle area and from communities along the I-5 corridor from Everett to Olympia, Washington. Pacifica’s market area has undergone significant business diversification, and the regional economy experienced strong growth and stability during the 1990s, fueled largely by the technology and aerospace sectors. However, the regional economy slowed noticeably during 2001, with a number of large employers, including Boeing, the largest employer in the Pacific Northwest, announcing layoffs and other workforce reductions. During 2002, Pacifica’s market area continued to feel the effects of the country’s overall economic slowdown, which appears to have been particularly pronounced in the Pacific Northwest, including unemployment levels above the national average. During 2003, the region experienced slow growth and recovery and management expects that to continue into 2004.

Competition

The Company operates in a highly competitive environment, competing for deposits, loans and other financial services with both banking and non-financial institutions. Competition among financial institutions in Pacifica’s primary market area is diverse, with the strongest competition coming from commercial banks, savings banks, savings and loan associations and brokerage firms.

Our banking competitors include national and super-regional banks, as well as a number of regional and community banks. Major banks have competitive advantages over Pacifica in that they have high public visibility and are able to maintain advertising and marketing activity on a much larger scale than Pacifica. Since single borrower lending limits imposed by law are dependent upon the capital of a banking institution, the branches of larger banks with substantial capital bases are also at an advantage with respect to loan applications that exceed Pacifica’s legal lending limit. However, these larger institutions generally serve a different customer base than that targeted by Pacifica, thus management believes we can compete effectively based upon our marketing plan, which targets small businesses, professionals and consumers who demand better service and more personalized products than larger institutions are willing to provide to small customers.

Owing in part to this phenomenon, our management expects the number of start-up community banks to increase because of the specialized service that such banks offer to potential customers. This shift likely will result in significant challenges to existing banks, including Pacifica, to maintain a competitive level. Further, an increase in competition with community banks will require us to focus carefully on customer service while maintaining asset mixes and interest rates to maintain growth.

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In order to compete with other financial institutions in our primary market area, whenever possible, Pacifica uses, the flexibility that is typical of being a locally-owned and managed community bank. Pacifica emphasizes personal, professional, responsive, accessible, international, flexible and innovative service. Loan and consumer banking products and services are packaged so that Pacifica’s loan, deposit and fee structures are competitive with the rest of the industry.

Management believes bank competition may change dramatically over the next several years as the major regional banks continue to consolidate. Large financial institutions may provide incentives for their customers to rely less on personal service and more on electronic banking. We see internet banking as another medium of service in addition to the traditional face-to-face approach. We believe the effective use of technology is an important competitive tool and plan to continue using internet banking to build on our strengths, without sacrificing a personal approach and convenience.

We will continue to experience increased competition from non-banking companies especially in light of the recent changes in federal banking laws that eliminate certain barriers between banking and commercial firms.

Employees

At December 31, 2003, the Company employed 48 full-time employees. None of our employees are represented by a collective bargaining group. Management considers its relationship with employees to be satisfactory.

Regulation and Supervision

General

The Company is a bank holding company within the meaning of the Bank Holding Company Act of 1956 (“BHC Act”) registered with and subject to examination by the Board of Governors of the Federal Reserve System (the “FRB”). The Bank is a Washington state-chartered commercial bank and is subject to examination, supervision and regulation by the Department and by the FDIC, which insures the Bank’s deposits.

Banking is a highly regulated industry. Pacifica’s earnings and activities are affected by legislation, by actions of the FRB, the Department, the FDIC and other regulators, and by local legislative and administrative bodies and decisions of courts in Washington State. That legislation and regulation, as well as the supervisory directive discussed below, do and will continue in the future to:

The likelihood of any such changes and their impact on us are impossible to predict. There can be no assurance whether any legislation or regulation will place additional limitations on Pacifica’s operations or

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adversely affect Pacifica’s earnings. The earnings of Pacifica are also affected by general economic conditions and the conduct of monetary policy by the U.S. government.

Supervisory Directive

As a result of a September 2001 examination by the FDIC and the Washington State Department of Financial Institutions, Division of Banks (the “Department”), the Bank became subject to a Supervisory Directive dated March 27, 2002. In response to the Supervisory Directive, management prepared action plans, formed an Asset Quality Committee, and took other steps to improve credit quality, improve capital ratios, increase earnings and promote stability during 2002.

The FDIC and the State conducted a joint examination in late 2002 and acknowledged improvement in the condition of the Bank. The regulators determined that the Bank should continue to remain subject to a revised supervisory directive. As a result, the March 27, 2002 Supervisory Directive was revised effective February 25, 2003.

The FDIC and the State conducted a joint examination in November 2003 and again acknowledged the progress the Bank has made. The regulators determined that the Bank should remain subject to a supervisory directive at least until the next regulatory examination. As a result, effective February 24, 2004, a Supervisory Directive (“Directive”) was issued that modified and replaced the previous two supervisory directives issued on March 27, 2002 and February 25, 2003, respectively. Our business plan and operating budget have us on target for meeting the objectives set forth in the supervisory directive. As of December 31, 2003, the Bank has reduced by 86% the amount of its classified assets that the FDIC had identified as of September 30, 2002, which exceeded the target of a 50% reduction as set forth in the Supervisory Directive for year-end 2003. The Bank maintained the “well-capitalized” designation as delineated by FDIC regulations. Its Tier 1 Leverage Capital ratio was 9.94% as of December 31, 2003, which surpassed the 8% minimum level required.

The revised Directive addressed a number of issues related to the Bank’s growth, earnings, and capital, by:

We do not expect the limitations of the Supervisory Directive to reduce our ability to achieve our plan for 2004.

Recent Reform Legislation

Congress enacted major federal financial institution legislation in 1999. Among other things, the legislation allows certain affiliations among securities, insurance, banking and other financial companies and provides for the creation of financial holding companies and financial subsidiaries.

Affiliate Transactions

Federal law imposes certain restrictions on transactions between insured depository institutions and their nonbank subsidiaries. With certain exceptions, federal law also imposes limitations on, and requires collateral for, extensions of credit by insured depository institutions to their nonbank affiliates. As an insured depository institution, the Bank is subject to these restrictions and limitations.

Branching and Interstate Acquisitions

Federal law allows (a) banks in states that do not prohibit out-of-state mergers to merge with the approval of the appropriate federal banking agency, and (b) state banks to establish de novo branches out of their state if such branching is expressly permitted by the other state.

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Banking Activities

Federal and Washington state law and regulations govern the Bank’s minimum capital requirements, required reserves against deposits, investments, loans (including loans to directors, officers and principal shareholders), legal lending limits, mergers and consolidations, borrowings, payment of dividends, establishment of branches and other aspects of its operations. The Department and the FDIC also have extensive authority to prohibit banks under their supervision from engaging in what they consider to be unsafe and unsound practices.

Capital Adequacy Requirements

The FDIC has adopted regulations establishing minimum requirements for the capital adequacy of insured banks which address both risk-based capital and leverage capital. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Capital.” The FRB has also established capital adequacy requirements for bank holding companies similar to those for banks.

Reports and Examinations

Pacifica is required to file periodic reports with the FDIC, the FRB and the Department and is subject to periodic examinations and evaluations by those regulatory authorities. These examinations must be conducted every 12 months, except that the FDIC may examine certain well-capitalized banks every 18 months. It is the policy of the Department to conduct joint examinations with the FDIC whenever possible.

Priority of Claims

In the liquidation or other resolution of a failed insured depository institution, deposits in offices and certain claims for administrative expenses and employee compensation are afforded a priority over other general unsecured claims, including non-deposit claims. Such priority creditors would include the FDIC, which succeeds to the position of insured depositors.

Securities Reporting

Pacifica is subject to the information, proxy solicitation, insider trading restrictions and other requirements of the Securities Exchange Act of 1934. Prior to December 31, 2000, the Bank filed recurring reports under the Securities Exchange Act with the FDIC’s Registration, Disclosure and Securities Information Unit. After that date, all recurring reports relating to Pacifica Bancorp Inc. are filed with the Securities and Exchange Commission and are available on the SEC’s EDGAR database at http://www.sec.gov.

USA Patriot Act of 2001

Under the USA Patriot Act of 2001, adopted by the U.S. Congress on October 26, 2001 to combat terrorism, FDIC insured banks and commercial banks will be required to increase their due diligence efforts for correspondent accounts and private banking customers. The USA Patriot Act requires the Bank to engage in additional record keeping or reporting, requiring identification of owners of accounts, or of the customers of foreign banks with accounts, and restricting or prohibiting certain correspondent accounts.

ITEM 2. PROPERTIES

Pacifica’s banking operations and administrative functions are carried on at its main office, located in the Skyline Tower, 10900 NE 4^th Street, Bellevue, Washington 98004, in the central business district of Bellevue. Pacifica’s Seattle Office is located at 705 5^th Avenue South, Seattle, Washington 98104. Pacifica currently leases approximately 21,648 square feet for operations of the Bank and does not plan to rent additional space during 2004.

ITEM 3. LEGAL PROCEEDINGS

From time to time, Pacifica may be a party to routine litigation incidental to its business. Pacifica is not currently a party to any litigation, the adverse determination of which would be likely to have a material adverse effect upon its business operations or assets.

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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

NONE.

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PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Market for Common Equity

Pacifica’s stock is not listed on any exchange or quoted on any inter-dealer quotation system or traded on an over-the-counter market. We have not been notified that any broker makes a market in Pacifica’s common stock, and sales are minimal. Due to the limited information available, the following price information may not accurately reflect the actual market value of Pacifica’s shares. The following are the high and low sale prices for Pacifica’s stock sold between individual investors in transactions known to Pacifica, during 2003, 2002 and 2001.

As of December 31, 2003, Pacifica’s common stock was held of record by approximately 521 shareholders, a number that does not include beneficial owners who hold shares in “street name.”

Dividends

Federal and applicable state banking laws and regulations limit the Bank’s ability to pay dividends to the Company, and as a result, those laws and regulations indirectly limit the Company’s ability to meet its expenses or to pay dividends to shareholders. On January 30, 2001, the Company adopted a dividend policy that provides that the Board of Directors will declare dividends only if the Company is considered to have adequate capital and adequate earnings. The Company plans to retain earnings to support planned growth over the near term and does not anticipate paying dividends in the foreseeable future. As discussed in “Description of Business - Regulation and Supervision”, we presently are operating under a supervisory directive that, among other things, limits the Bank’s ability to pay dividends to the Company which in turn limits the Company’s ability to pay dividends to shareholders.

Stock Option Plans

In order to attract and retain highly qualified personnel, the Company adopted the Bank’s Employee Stock Option Plan (the “Option Plan”), which was approved by the Bank’s shareholders in 1998 and by Pacifica’s shareholders in April 2001. At the time of approval, 1,000,000 shares of common stock (adjusted for the 2-for-1 split as a result of the reorganization effective January 1, 2001) were reserved for issuance under the Option Plan. Upon closing of the reorganization, each outstanding and unexercised option to purchase one share of the Bank’s common stock was converted to an option to purchase two shares of the Company’s common stock on substantially the same terms as the Option Plan. Also in connection with the reorganization, the Option Plan was amended to cover issuances of future options by the Company, and otherwise continues in form and substance similar to the Option Plan in effect before the reorganization. The Option Plan is administered by the Board of Directors of Pacifica (or a committee thereof). At the 2002 Annual Meeting of Shareholders, Pacifica shareholders approved an amendment to the Option Plan, to increase the total number of shares available for issuance under the Option plan by 200,000 to 1,200,000.

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Stock Repurchase Program

On October 28, 2003, the Board of Directors adopted a Stock Repurchase Program, authorizing the Company to repurchase up to 5 percent, or approximately 162,000 shares, of the outstanding shares of its common stock from shareholders that have expressed an interest in selling their Pacifica common stock. The purpose of the program is to provide shareholders with a means to sell their shares of Company common stock at a fair price, to achieve some degree of liquidity for the Company’s common stock and to accumulate shares of common stock that can be used in connection with the Company’s equity based compensation plans without further dilution of common shareholders’ equity. Since the beginning of the program, the Company has repurchased 34,360 shares in 2003 with prices ranging from $5.00 to $5.25 per share. The Stock Repurchase Program expired on December 15, 2003, and any additional stock repurchases are subject to prior board approval.

ITEM 6. SELECTED FINANCIAL DATA

See inside cover of this Annual Report for a tabular presentation of selected audited consolidated financial data for each full year that Pacifica has been in operation. The historical operating results are not necessarily indicative of the results to be expected for any other period. The data set forth in the table should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Company’s consolidated financial statements and related notes, included elsewhere in this Annual Report. Note also that data presented for dates and periods ending prior to the holding company reorganization reflect only the financial condition, results of operation and other financial information concerning the Bank.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with the Financial Statements and Notes thereto presented elsewhere in this report.

Overview

Note. As a result of the closure of Pacifica Mortgage Company effective March 31, 2003, operating results for Pacifica Mortgage were reported as “Loss from Discontinued Operations” for the year ended December 31, 2003. Income and expenses items related to Pacifica Mortgage for 2002 and 2001 were adjusted to conform to the 2003 presentation.

During our fifth full year of operation, we continue to focus on improving asset quality, increasing earnings and growing capital. As a result, our rate of growth slowed from the rates experienced in the first three years of operations. Total assets were $161.9 million at December 31, 2003, a decrease of 2% from $164.7 million at December 31, 2002. This decrease was primarily attributable to the decreases in cash and federal funds sold resulting from a reduction in deposits. Gross loans were $116.8 million at December 31, 2003, an increase of 6% compared to $109.7 million at the end of 2002. Securities increased 22% to $27.4 million at year-end 2003, from $22.5 million at the end of 2002. Deposits decreased from $148.3 million at December 31, 2002 to $133.7 million at year-end 2003, a decrease of $14.6 million, or 10%, during 2003. This reduction is due in part to the relatively poor prevailing interest rate environment and the general economic conditions facing our customers, and in part to our efforts to improve the interest margin, monitor our asset size and increase our loan-to-deposit ratio by reducing our time deposits. Pacifica reported net income available to shareholders of $1.2 million, or $0.36 per diluted share for 2003, up $1.1 million, or 1153%, from net income available to common shareholders of $94,000, or $0.03 per share in 2002. The Company transferred $900,000 of its excess loan loss reserve into earnings during 2003 as compared to $603,000 in 2002. The reduction of the allowance for loan losses resulted from higher than anticipated net recoveries on previously charged off loans and a significant improvement in our asset quality and is discussed in more detail below under “Analysis of Provision and Allowance for Loan Losses.” Exclusive of the transfers from the allowance for loan losses, our operating results would have shown a net income of $278,000, or $0.09 per diluted share for 2003 and a net loss of ($495,000) or ($0.15) per share for 2002. This performance compares with a loss of ($2.97) million in 2001. Shareholders’ equity increased to $12.6

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million at the end of 2003 from $12.2 million at December 31, 2002. Our capital ratios are at levels above the federal regulatory criteria for well-capitalized institutions. Since inception, the decline of our capital and various other ratios were primarily the result of a ($2.97) million net loss in 2001.

Return on average assets (ROA) was 0.78% for the year 2003, 0.07% for 2002, and (1.84%) for 2001. Return on average stockholders’ equity (ROE) was 9.66% for the year 2003, 0.92% for 2002, and (19.53%) for 2001. The Bank’s average equity to average assets ratio was 8.03%, 7.25%, and 9.41%, respectively, for 2003, 2002, and 2001. The improvements in ROA and ROE were due primarily to the net income we had in 2003 and 2002, while the various performance ratios were negatively affected by the ($2.97) million loss in 2001. The loss in 2001 significantly increased the average balance of the accumulated deficits for 2002, which lowered the average equity balance for 2002. Therefore, our average equity to average assets ratio was much lower in 2002 as compared to 2001. We expect our rate of growth to slow from the rates we experienced in the first three years of operations and our focus continues to be on improving asset quality, increasing earnings and enhancing overall efficiency.

Results of Operations

Pacifica’s results of operations depend to a large degree on its net interest income. Net interest income is the difference between interest income, principally from loan and investment securities portfolios, and interest expense, primarily on customer deposits and borrowings. Changes in net interest income are influenced by the level and relative mix of interest-earning assets and interest-bearing liabilities. Interest income and expense are affected significantly by general economic conditions, particularly changes in market interest rates, and by government policies and the actions of regulatory authorities.

Pacifica also generates non-interest income, primarily through service charges, international service fees and other sources. The primary components of Pacifica’s operating expenses are compensation and employee benefits expenses, and occupancy expense.

Pacifica reported net income of $1.2 million, or $0.36 per diluted share for 2003, compared to a net income of $94,000 or $.03 per diluted share for 2002, and a net loss of $(2.97) million, or $(0.91) per diluted share for 2001. The improvement was due primarily to a higher net interest margin resulting from a lower cost of funds, an increase in non-interest income, and a decrease in losses from discontinued operations. The increase in net income for 2003 as compared to 2002 is particularly significant due to the impact of the transfer of excess funds from the allowance for loan losses into earnings. Specifically, $900,000 of excess funds from the allowance for loan losses was transferred to earnings during 2003 while $603,000 of excess funds from the allowance for loan losses was transferred to earnings in 2002. Net income excluding the transfer of excess loan loss reserve to earnings was $278,000 for 2003, up $773,000 from ($495,000) for the same period of 2002. See below under “Analysis of Provision and Allowance for Loan Losses” for a discussion of the changes in the allowance during 2003 and 2002. During 2003, net interest margin increased to 4.45%, as compared to 3.71% for the same period of 2002, up 74 basis points. Earning assets and interest-bearing liabilities both decreased during 2003 while the corresponding yields decreased slightly on earning assets and substantially on interest-bearing liabilities. Results of operations for the year 2003 significantly improved from 2002 and 2001.

Net Interest Income

Net interest income is the difference between total interest income and total interest expense. Changes in net interest income are affected by several factors, including changes in average balances of earning assets and interest-bearing liabilities, changes in rates on earning assets and rates paid for interest-bearing liabilities, and the level of noninterest-bearing deposits and stockholders’ equity. Loans are the highest-yielding component of Pacifica’s earning assets. Loans averaged 72% of Pacifica’s total interest-earning assets during 2003, compared to 69% during 2002.

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Our summary average balance sheet and net interest income data for the periods are as follows:

Net interest income before provision for loan losses for the year 2003 increased by $835,000, or 14%, to $6.7 million, compared to an increase of $614,000, or 12% to $5.9 million in 2002. The increase in net interest income in 2003 reflects the effect of the repricing of time certificates of deposit to a lower average rate over time coupled with a decrease in average interest-bearing liabilities and a balance sheet shift from cash equivalents to loans and investments. On a dollar-for-dollar basis, interest-earning assets decreased

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more than interest-bearing liabilities but on a percentage basis, interest-earning assets decreased slower than interest-bearing liabilities during 2003. Compared with 2002, average interest-earning assets decreased approximately $8.0 million, or 5%, to $151.2 million while average interest-bearing liabilities decreased $7.0 million, or 5.1%, to $128.8 million. Due primarily to the smaller earning asset balances in 2003 as compared to 2002, total interest income for 2003 decreased $567,000, or 5.6%, from 2002. Meanwhile, the repricing of time certificates and the decline in average interest-bearing liabilities allowed us to lower our cost of funds. Total interest expense for 2003 decreased $1.4 million, or 33%, as compared to 2002. The increase in net interest income in 2002 reflects the impact of the repricing of time certificates to lower levels. On both dollar-for-dollar basis and percentage basis, interest-earning assets increased slower than interest-bearing liabilities during 2002. Compared with 2001, average interest-earning assets increased approximately $1.5 million, or 1%, to $159.2 million while average interest-bearing liabilities increased $3.3 million, or 2%, to $135.6 million. Due to the lower yield on interest-earning assets in 2002 as compared to 2001, total interest income for 2002 decreased $2.2 million, or 18%, from 2001. Meanwhile, the repricing of time certificates allowed us to lower our cost of funds. Total interest expense for 2002 decreased $2.7 million, or 39%, as compared to 2001. Given the current rate environment and the anticipated shift in the balance sheet from cash and investments into loans, we expect net interest margin and net interest income to increase during 2004.

Net interest margin (net interest income divided by average earning assets) was 4.45% in 2003, compared with 3.71% in 2002. The increase in net interest margin reflects the positive effect of our efforts to lower the cost of deposits and the decrease in average interest bearing liabilities. The average yield on earning assets decreased slightly to 6.32% during 2003 from 6.36% in 2002. Meanwhile, the average cost of interest-bearing liabilities for 2003 decreased significantly to 2.19% from 3.11% in 2002.

The minimal decrease in average yield on interest-earning assets is particularly noteworthy due to the 25 basis point decline in short-term interest rates in 2003. Our interest-earning assets have been repricing less quickly than our interest-bearing liabilities which effectively lowered the cost of deposits more than it reduced loan yields. Increased yields on investments helped to limit the decline in yields on other earning assets. Over the course of 2002 and 2003, Pacifica has significantly lowered its cost of deposits, resulting in a positive impact on our net interest margin. At December 31, 2003, Pacifica had $76.3 million in time certificates of deposits. During 2003, Pacifica replaced certain interest-bearing deposits with borrowings. At December 31, 2003, Pacifica had outstanding borrowings in the amount of $14.3 million of which $7.5 million have the potential of repricing during 2004 which could impact the Company’s cost of funds. See additional information under the borrowings section.

To a large extent, the asset yields and cost of funds reflect the level of interest rates as set by the Federal Reserve Board and the competitive nature of the financial services industry. Typically, Pacifica’s assets have tended to track the prime rate and reprice more quickly than its liabilities in the past. However, due to historically low interest rates, borrowers have been increasingly interested in our fixed rate products which places the Company in a liability sensitive position. Therefore, net interest margin could experience a “squeeze” in a rising interest rate environment. In contrast, Pacifica may experience increasing net interest income caused by this same principle in periods of falling interest rates, before the repricing of interest-earning assets catches up with the repricing of interest-bearing liabilities. Management continually monitors Pacifica’s mix of interest-earning assets and interest-bearing liabilities to maintain an appropriate balance. We also maintain programs to set floors on our loans to protect our interest earnings in times of a downward rate cycle; however, these floors can have a lagging effect in an increasing rate cycle which can cause a “squeeze” on our net interest margin as rates increase.

Average loans (net of deferred loan fees) were approximately $108.7 million in 2003, down $1.1 million from $109.8 million in 2002. Due to significant loan growth during the fourth quarter of 2003, total loans (net of deferred loan fees) as of year-end 2003 increased by 7% as compared to year-end 2002, yet the average balance for the year declined. The yield on the loan portfolio (net of deferred loan fees) averaged 7.35% in 2003, compared to 7.84% in 2002. The decrease in loan yield is consistent with the drop in interest rates and the particularly large amount of refinancing activity Pacifica experienced during 2003. During 2003, average interest-bearing deposits were $124.3 million, a decrease of $9.2 million compared to 2002. The cost of interest-bearing deposits decreased from 3.10% for 2002 to 2.12% for 2003.

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Income on investments, interest-earning deposits, Federal Home Loan Bank stock and federal funds sold totaled $1.57 million in 2003, an increase of $54,000, or 3.5%, when compared to 2002. The yield on investments was 5.41% for 2003, as compared to 4.78% for 2002.

Rate/Volume Analysis. The dollar amounts of interest income and interest expense fluctuate depending upon changes in interest rates and upon changes in amounts (volume) of Pacifica’s interest-earning assets and interest-bearing liabilities. Changes attributable to: (i) changes in volume (changes in average outstanding balances multiplied by the prior period’s rate); (ii) changes in rate (changes in average interest rate multiplied by the prior period’s volume); and (iii) changes in rate/volume (changes in rate times the change in volume that were allocated proportionately to the changes in volume and the changes in rate) were as follows: