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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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(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, 2000
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
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PACIFIC FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Washington 91-1815009
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
300 East Market Street
Aberdeen, Washington 98520-5244
(360) 533-8870
(Address, including zip code, and telephone number,
including area code, of Registrant's principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days:
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Title of Class Outstanding at March 31, 2000
-------------- -----------------------------
Common Stock, par value $1.00 per share 496,770 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, 2000 AND DECEMBER 31, 1999 3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2000 AND 1999 4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTH PERIODS ENDED MARCH 31, 2000 AND 1999 5
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
THREE MONTH PERIODS ENDED MARCH 31, 2000 AND 1999 7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 11
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK 14
PART II OTHER INFORMATION 14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 14
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 15
SIGNATURES 16
2
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
Pacific Financial Corporation
March 31, 2000 and December 31, 1999
March 31, December 31,
2000 1999
(Unaudited)
ASSETS
Cash and due from banks $ 10,740 $ 13,080
Interest bearing balances with banks 1,776 1,744
Federal funds sold 125 --
Investment securities available for sale 61,693 65,625
Investment securities held-to-maturity 1,553 1,615
Loans 162,826 152,664
Allowance for credit losses 1,980 1,930
----- -----
LOANS, NET 160,846 150,734
Premises and equipment 3,417 3,510
Foreclosed real estate 26 177
Accrued interest receivable 2,122 2,004
Cash surrender value of life insurance 2,356 2,330
Other assets 1,458 1,370
----- -----
TOTAL ASSETS $246,112 $242,189
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Non-interest bearing $ 35,227 $ 34,359
Interest bearing 178,551 171,780
------- -------
TOTAL DEPOSITS 213,778 206,139
Accrued interest payable 572 549
Short-term borrowings 8,164 9,675
Other liabilities 1,372 4,388
----- -----
TOTAL LIABILITIES 223,886 220,751
STOCKHOLDERS' EQUITY
Common Stock (par value $1); authorized: 497 497
5,000,000 shares; issued 496,770 shares
Surplus 11,420 11,420
Retained earnings 11,497 10,473
Accumulated other comprehensive income(loss) (1,188) (952)
-------- -----
TOTAL STOCKHOLDERS' EQUITY 22,226 21,438
-------- --------
Total liabilities and stockholders' equity $246,112 $242,189
3
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Three months ended March 31, 2000 and 1999
(Dollars in thousands, except per share)
2000 1999
(UNAUDITED) (UNAUDITED)
INTEREST INCOMe
Loans $3,855 $3,390
Securities held to maturity - tax exempt 25 27
Securities available for sale:
Taxable 777 622
Tax-exempt 156 149
Deposits with banks
and federal funds sold 36 231
-- ---
Total interest income 4,849 4,419
INTEREST EXPENSE
Deposits 1,786 1,679
Other borrowings 129 15
--- --
Total Interest Expense 1,915 1,694
NET INTEREST INCOME 2,934 2,725
Provision for credit losses 53 --
----- -----
Net interest income after provision
for credit losses 2,881 2,725
NON-INTEREST INCOME
Service charges 179 183
Mortgage loan origination fees 1 15
Gain on sale of foreclosed real estate 31 --
Other operating income 145 129
--- ---
Total non-interest income 356 327
NON-INTEREST EXPENSE
Salaries and employee benefits 1,014 967
Occupancy and equipment 240 254
Other 492 467
--- ---
Total non-interest expense 1,746 1,688
Income before income taxes 1,491 1,364
Provision for income taxes 467 414
--- ---
NET INCOME $1,024 $ 950
Earnings per common share:
Basic $2.06 $1.94
Diluted 2.04 1.91
Average shares outstanding:
Basic 496,770 488,969
Diluted 502,082 498,221
4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three months ended March 31, 2000 and 1999
(Dollars in thousands)
2000 1999
(UNAUDITED) (UNAUDITED)
OPERATING ACTIVITIES
Net income $ 1,024 $ 950
Adjustments to reconcile net income to net cash
Provided by operating activities:
Provision for credit losses 53 --
Depreciation and amortization 112 149
Stock dividends received (55) (55)
Gain on sale of foreclosed real estate (31) --
(Increase) decrease in accrued interest receivable (118) 38
Increase (decrease) in accrued interest payable 23 (50)
Other 117 (131)
--- -----
Net cash provided by operating activities 1,125 901
INVESTING ACTIVITIES
Net increase in federal funds (32) (1,515)
Increase in interest bearing
deposits with banks (125) (516)
Proceeds from maturities of investments held to maturity 62 56
Purchases of securities available for sale -- (28,926)
Proceeds from maturities of
securities available for sale 3,607 21,450
Net (increase) decrease in loans (10,165) 2,938
Additions to premises and equipment (17) (79)
Proceeds from sales of foreclosed real estate 182 --
--- ---
Net cash used in investing activities (6,488) (6,592)
FINANCING ACTIVITIES
Net increase in deposits 7,639 2,604
Net increase (decrease) in short-term borrowings (1,511) 6,042
Payment of dividends (3,105) (2,379)
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Net cash provided by financing activities 3,023 6,267
Net increase (decrease) in cash and due from banks $(2,340) $ 576
CASH AND DUE FROM BANKS
Beginning of period $13,080 $ 8,634
End of period $10,740 $ 9,210
5
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for:
Interest $ 1,892 $ 1,744
Income Taxes 30 --
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES
Unrealized losses on securities available
for sale, net of tax $ (236) $ (337)
Foreclosed real estate acquired in settlement of loans -- 30
6
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Three months ended March 31, 2000 and 1999
(Dollars in thousands) (Unaudited) ACCUMULATED
OTHER
COMPREHENSIVE
COMMON RETAINED INCOME
STOCK SURPLUS EARNINGS (LOSS) TOTAL
Balance December 31, 1998 $489 $10,972 $9,656 $368 $21,485
Other comprehensive income:
Net income 950 950
Change in unrealized loss
on securities available for sale, net (219) (219)
Comprehensive income 731
---- ------ ------ ---- ------
Balance March 31, 1999 $489 $10,972 $10,606 $149 $22,216
Balance December 31, 1999 $497 $11,420 $10,473 $(952) $21,438
Other comprehensive income:
Net income 1,024 1,024
Change in unrealized loss
on securities available for sale, net (236) (236)
Comprehensive income 788
---- ------ ------ ------ ------
Balance March 31, 2000 $497 $11,420 $11,497 $(1,188) $22,226
7
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 generally
accepted accounting principles for interim financial information and with
instructions to Form 10Q. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
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, 2000, are not necessarily indicative of the results anticipated for
the year ending December 31, 2000.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting periods.
Actual results could differ from those estimates.
All dollar amounts in tables, except per share information, are stated in
thousands.
2. INVESTMENT SECURITIES
- ------------------------------
Investment securities consist principally of short and intermediate term debt
instruments issued by the U.S. Treasury, other U.S. government agencies, State
and local government units, and other corporations. The Company is a stockholder
in the Federal Home Loan Bank of Seattle (FHLB).
SECURITIES HELD TO MATURITY AMORTIZED UNREALIZED FAIR
COST GAINS VALUE
(LOSSES)
March 31, 2000
State and Municipal Securities $ 1,553 -0- 1,553
----- ------ -----
TOTAL $ 1,553 -0- 1,553
SECURITIES AVAILABLE FOR SALE AMORTIZED UNREALIZED FAIR
COST GAINS VALUE
(LOSSES)
March 31, 2000
U.S. Treasury Securities $ 504 (9) 495
U.S. Government Securities 31,944 (1,110) 30,834
State and Municipal Securities 12,293 (208) 12,085
Corporate Securities 15,365 (480) 14,885
Equity Securities 3,394 -0- 3,394
------ ------ ------
TOTAL $63,500 (1,807) 61,693
8
3. ALLOWANCE FOR CREDIT LOSSES
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THREE MONTHS ENDED
MARCH 31,
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2000 1999
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Balances at beginning of period $1,930 $1,862
Provision for possible credit losses 53 0
Charge-offs 8 3
Recoveries 5 33
Net recoveries (charge-offs) (3) 30
-------- --------
Balances at end of period $1,980 $1,895
4. COMPUTATION OF BASIC EARNINGS PER SHARE:
- -------------------------------------------------
THREE MONTHS ENDED
MARCH 31,
--------------------
2000 1999
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Net Income $1,024,000 $950,000
Shares Outstanding,
Beginning of Period 496,770 488,969
Shares Issued During Period Times
Average Time Outstanding -- --
Average Shares Outstanding 496,770 488,969
Basic Earnings Per Share $2.06 $1.94
9
5. COMPUTATION OF DILUTED EARNINGS PER SHARE:
- ---------------------------------------------------
THREE MONTHS ENDED
MARCH 31,
--------------------
2000 1999
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Net Income $1,024,000 $950,000
Options Outstanding 15,710 18,710
Proceeds Were Options Exercised $1,424,485 $1,229,500
Average Share Price During Period $137.00 $130.00
Proceeds Divided By Average Share Price 10,398 9,458
Incremental Shares 5,312 9,252
Average Shares Outstanding 496,770 488,969
Incremental Shares
Plus Outstanding Shares 502,082 498,221
Diluted Earnings Per Share $2.04 $1.91
10
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
A WARNING ABOUT FORWARD-LOOKING INFORMATION
We have made forward-looking statements in this document 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
or assumed 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. effective December 15, 1999, Harbor Bancorp, Inc. (now named
Pacific Financial Corporation) completed a merger of equals with
Pacific Financial Corporation; anticipated cost savings from the merger
may not be fully realized or realized within the expected time frame
(the transaction was treated as a pooling for accounting purposes, and
accordingly, all prior results of operations have been restated);
2. competitive pressures among depository and other financial
institutions may increase significantly;
3. changes in the interest rate environment may reduce margins;
4. 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 or a reduced demand for credit;
5. legislative or regulatory changes may adversely affect the
businesses in which we are engaged; and
6. adverse changes may occur in the securities markets.
Our management believes the forward-looking statements are reasonable;
however, you should not place undue reliance on them. Forward-looking statements
are not guarantees of performance. They involve risks, uncertainties and
assumptions. The future results and shareholder values of the combined
corporation following completion of the merger may differ materially from those
expressed or implied in these forward-looking statements. Many of the factors
that will determine these results and values are beyond our ability to control
or predict.
NET INCOME. For the three months ended March 31, 2000, Pacific's net income was
$1,024,000 compared to $950,000 for the same period in 1999. Major contributing
factors for the increase were an increase in net interest income and an increase
in non-interest income.
11
NET INTEREST INCOME. Net interest income for the three months ended March 31,
2000 increased $209,000, or 7.7% compared to the same period in 1999. This is
due primarily to increased lending volume during the period. The average return
on loans was approximately 68 basis points higher for the period ended March 31,
2000 compared to the same period in 1999, while average deposit rates were
approximately 40 basis points higher for the same periods.
Interest income for the three months ended March 31, 2000, increased $430,000,
or 9.7%, compared to the comparable period in 1999. Securities balances and
average federal funds sold balances decreased during the three months ended
March 31, 2000, as the result of increased lending volume. Total loans
outstanding for the three months ended March 31, 2000 and March 31, 1999 were
$162,826,000 and $144,343,000, respectively, or 12.8% higher for the period in
2000.
Interest expense for the three months ended March 31, 2000 increased $221,000,
or 13%, compared to the same period in 1999. The deposit balances for the three
months ended March 31, 2000 and March 31, 1999 were $213,778,000 and
$213,299,000, respectively, while short term borrowings and federal funds
purchased for the periods were $8,164,000 and $6,128,000, respectively, an
increase of 33.2% over the 1999 period.
PROVISION AND ALLOWANCE FOR CREDIT LOSSES. During the three months ended March
31, 2000, $53,000 was provided for possible credit losses, compared to no
provision for the same period in 1999. For the three months ended March 31,
2000, net charge-offs were $3,000, compared to net recoveries of $30,000 during
the same period in 1999.
At March 31, 2000, the allowance for credit losses stood at $1,980,000 compared
to $1,930,000 at December 31, 1999, and $1,895,000 at March 31, 1999. The ratio
of the allowance to total loans outstanding was 1.22%, 1.26% and 1.31%,
respectively, at March 31, 2000, December 31, 1999, and March 31, 1999.
Management considers the allowance for possible credit losses to be adequate for
the periods indicated.
NON-PERFORMING ASSETS AND FORECLOSED REAL ESTATE OWNED. Non-performing assets
totaled $1,296,000 at March 31, 2000. This represents .80% of total loans,
compared to $492,000 or .32% at December 31, 1999, and $224,000 or .16% at March
31, 1999. Accruing loans past due 90 days or more at March 31, 2000 include
government guaranteed loans totaling $864,000 which became non-performing during
the quarter ended March 31, 2000. Non-accrual loans at March 31, 2000 totaled
$292,000 of which $266,000 are secured by real estate. Management believes
losses associated with these loans will be minimal.
ANALYSIS OF NON-PERFORMING ASSETS
MARCH 31 DECEMBER 31 MARCH 31
(in thousands) 2000 1999 1999
Accruing loans past due 90 days or more $978 $140 $61
Non-accrual loans 292 175 2
Foreclosed real estate 26 177 161
-- --- ---
TOTAL $1,296 $492 $224
12
NON-INTEREST INCOME AND EXPENSES. Non-interest income for the three months ended
March 31, 2000 increased $29,000 compared to the same period in 1999. Service
charges on deposit accounts decreased $4,000 compared to the same period in
1999. Mortgage loan origination fees decreased $14,000 compared to the three
months ended March 31, 1999 due to decreased loan refinancing activity. Gain on
sale of foreclosed real estate totaled $31,000 for the period ending March 31,
2000 compared to zero for the same period in 1999. Other operating income for
the three months ended March 31, 2000 increased $16,000 compared to the same
period in 1999. This was attributable primarily to increases in credit card and
ATM fees.
Non-interest expense for the three months ended March 31, 2000 increased $58,000
compared to the same period in 1999. For the three-month period in 2000,
salaries and benefits increased $47,000 while occupancy expense decreased
$14,000 and other expenses increased $25,000, compared to the same period in
1999. The increase in salaries and benefits was due to normal salary increases
for staff and an increase in the number of personnel.
INCOME TAXES. The federal income tax provision for the three months ended March
31, 2000 was $467,000, an increase of $53,000 compared to the same period in
1999. The effective tax rate for the 2000 period is 31.3% compared to 30.4% in
1999.
FINANCIAL CONDITION. Total assets were $246,112,000 at March 31, 2000, an
increase of $3,923,000, or 1.6%, over year-end 1999. Loans were $162,826,000 at
March 31, 2000, an increase of $10,162,000, or 6.7%, over year-end 1999. Total
deposits were $213,778,000 at March 31, 2000, an increase of $7,639,000, or
3.7%, compared to December 31, 1999.
LOANS. Loan detail by category as of March 31, 2000 and December 31, 1999
were as follows:
March 31, December 31,
2000 1999
Commercial and industrial $54,113 $53,560
Agricultural 2,045 2,101
Real estate mortgage 96,392 88,905
Real estate construction 5,317 3,325
Installment 3,253 3,222
Credit cards and other 1,706 1,551
----- -----
Total Loans 162,826 152,664
Allowance for credit losses (1,980) (1,930)
------- -------
Net Loans $160,846 $150,734
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 quickly increased by taking advances available from the Federal
Home Loan Bank of Seattle.
13
SHAREHOLDERS' EQUITY. Total shareholders' equity was $22,226,000 at March 31,
2000, an increase of $788,000, or 3.7%, compared to December 31, 1999. Book
value per share increased to $44.74 at March 31, 2000 compared to $43.15 at
December 31, 1999. Book value is calculated by dividing total equity capital by
total shares outstanding.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest rate, credit, and operations risks are the most significant market
risks which affect the Company's performance. The Company relies on loan review,
prudent loan underwriting standards and an adequate allowance for possible
credit losses to mitigate credit risk.
An asset/liability management simulation model is used to measure interest rate
risk. The model produces regulatory oriented measurements of interest rate risk
exposure. The model quantifies interest rate risk through simulating forecasted
net interest income over a 12 month time period under various interest rate
scenarios, as well as monitoring the change in the present value of equity under
the same rate scenarios. The present value of equity is defined as the
difference between the market value of assets less current liabilities. By
measuring the change in the present value of equity under various rate
scenarios, management is able to identify interest rate risk that may not be
evident in changes in forecasted net interest income.
The Company is currently asset sensitive, meaning that interest earning assets
mature or reprice more quickly than interest-bearing liabilities in a given
period. Therefore, a significant increase in market rates of interest could
improve net interest income. Conversely, a decreasing rate environment may
adversely affect net interest income.
It should be noted that the simulation model does not take into account future
management actions that could be undertaken should actual market rates change
during the year. An important point should be kept in mind; the model simulation
results are not exact measures of the Company's actual interest rate risk. They
are rather only indicators of rate risk exposure, based on assumptions produced
in a simplified modeling environment designed to heighten sensitivity to changes
in interest rates. The rate risk exposure results of the simulation model
typically are greater than the Company's actual rate risk. That is due to the
conservative modeling environment, which generally depicts a worst-case
situation. Management has assessed the results of the simulation reports as of
March 31, 2000, and believes that there has been no material change since
December 31, 1999.
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Pacific Financial Corporation held its Annual Meeting of Stockholders
on April 17, 2000, at which the stockholders of the Company voted on and
approved the following:
1. The election of three Class A directors of Pacific Financial
Corporation for terms expiring at the Annual Meeting of
Stockholders in 2003.
2. Approval of 2000 Stock Incentive Compensation Plan.
14
The voting with respect to each of these matters was as follows:
1. Election of Directors
NAME FOR WITHHOLD
Dennis A. Long 371,644 85
Joseph A. Malik 370,428 1,301
Robert J. Worrell 370,428 1,301
2. Approval of 2000 Stock Incentive Compensation Plan
FOR AGAINST ABSTAIN
350,632 14,132 6,965
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit
-------
Exhibit No.
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10.1 2000 Stock Incentive Compensation Plan.
10.2 Bonus Program for Officers.
27 Financial Data Schedule for the three-month period
ended March 31, 2000.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter ended March 31,
2000.
15
SIGNATURES
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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 12, 2000 By: /s/ Dennis A. Long
-------------------
Dennis A. Long
President
By: /s/ John Van Dijk
-------------------
John Van Dijk, Treasurer
(Principal Financial and
Accounting Officer)
16