================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarter ended March 31, 2001
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 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, 2001
-------------- -----------------------------
Common Stock, par value $1.00 per share 2,500,505 shares
================================================================================
1
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION 3
ITEM 1. FINANCIAL STATEMENTS 3
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, 2001 AND DECEMBER 31, 2000 3
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED MARCH 31, 2001 AND 2000 4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2001 AND 2000 5
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
THREE MONTH PERIODS ENDED MARCH 31, 2001 AND 2000 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 13
PART II OTHER INFORMATION 13
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 13
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 14
SIGNATURES 14
2
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets
(Dollars in thousands)
Pacific Financial Corporation
March 31, 2001 and December 31, 2000
March 31, December 31,
2001 2000
(Unaudited)
Assets
Cash and due from banks $ 8,185 $ 8,619
Interest bearing balances with banks 14,274 480
Federal funds sold 6,000 570
Investment securities available for sale 41,481 53,696
Investment securities held-to-maturity 1,359 1,376
Federal Home Loan Bank stock, at cost 3,619 3,562
Loans 175,526 177,168
Allowance for credit losses 1,805 2,026
------- -------
Loans, net 173,721 175,142
Premises and equipment 4,106 4,122
Accrued interest receivable 2,093 2,302
Cash surrender value of life insurance 2,464 2,435
Other assets 1,101 1,009
------- -------
Total assets $258,403 $253,313
Liabilities and Stockholders' Equity
Deposits:
Non-interest bearing $ 33,517 $ 32,510
Interest bearing 195,411 181,001
------- -------
Total deposits 228,928 213,511
Accrued interest payable 788 779
Short-term borrowings 3,045 11,358
Other liabilities 1,496 4,922
------- -------
Total liabilities 234,257 230,570
Stockholders' Equity
Common Stock (par value $1); authorized: 2,501 2,503
25,000,000 shares; issued March 31,2001 -
2,500,505 shares;
December 31, 2000-2,503,130 shares
Surplus 9,806 9,859
Retained earnings 11,449 10,572
Accumulated other comprehensive
income(loss) 390 (191)
-------- --------
Total stockholders' equity 24,146 22,743
-------- --------
Total liabilities and stockholders' equity $258,403 $253,313
3
Condensed Consolidated Statements of Income
Three months ended March 31, 2001 and 2000
(Dollars in thousands, except per share)
2001 2000
(UNAUDITED) (UNAUDITED)
Interest Income
Loans $4,143 $3,855
Securities held to maturity
- tax exempt 23 25
Securities available for sale:
Taxable 628 777
Tax-exempt 136 156
Deposits with banks
and federal funds sold 55 36
----- -----
Total interest income 4,985 4,849
Interest Expense
Deposits 2,061 1,786
Other borrowings 90 129
----- -----
Total interest expense 2,151 1,915
Net Interest Income 2,834 2,934
Provision for credit losses 102 53
----- -----
Net interest income after provision
for credit losses 2,732 2,881
Non-interest Income
Service charges 174 179
Mortgage loan origination fees 4 1
Gain on sale of foreclosed real estate -- 31
Other operating income 136 145
----- -----
Total non-interest income 314 356
Non-interest Expense
Salaries and employee benefits 1,047 1,014
Occupancy and equipment 234 240
Other 527 492
----- -----
Total non-interest expense 1,808 1,746
Income before income taxes 1,238 1,491
Provision for income taxes 361 467
----- -----
Net Income $877 $ 1,024
Earnings per common share:
Basic $.35 $.41(1)
Diluted .35 .41(1)
Average shares outstanding:
Basic 2,502,022 2,483,850(1)
Diluted 2,523,358 2,510,410(1)
(1) restated to reflect 5 for 1 stock split effected July 2000
4
Condensed Consolidated Statements of Cash Flows
Three months ended March 31, 2001 and 2000
(Dollars in thousands)
2001 2000
(UNAUDITED) (UNAUDITED)
OPERATING ACTIVITIES
Net income $ 877 $ 1,024
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for credit losses 102 53
Depreciation and amortization 108 112
Stock dividends received (57) (55)
Loss on sale of premises and equipment (1) --
Gain on sale of foreclosed real estate -- (31)
(Increase) decrease in accrued interest
receivable 209 (118)
Increase in accrued interest payable 9 23
Other (623) 117
---- ----
Net cash provided by operating activities 624 1,125
INVESTING ACTIVITIES
Net increase in federal funds (5,430) (32)
Increase in interest bearing
deposits with banks (13,794) (125)
Proceeds from maturities of investments
held to maturity 17 62
Proceeds from maturities of
securities available for sale 13,072 3,607
Net (increase) decrease in loans 1,321 (10,165)
Additions to premises and equipment (105) (17)
Proceeds from sales of foreclosed
real estate -- 182
Proceeds from sales of premises and equipment 16 --
---- ----
Net cash used in investing activities (4,903) (6,488)
FINANCING ACTIVITIES
Net increase in deposits 15,417 7,639
Net decrease in short-term borrowings (8,313) (1,511)
Repurchase and retirement of common stock (55) --
Payment of dividends (3,204) (3,105)
------ ------
Net cash provided by financing activities 3,845 3,023
Net decrease in cash and due from banks $ (434) $ (2,340)
5
CASH AND DUE FROM BANKS
Beginning of period $8,619 $ 13,080
End of period $8,185 $ 10,740
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for:
Interest $ 2,142 $ 1,892
Income Taxes 100 30
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES
Change in fair value of securities available
for sale, net of tax $ 581 $ (236)
Condensed Consolidated Statements of Shareholders' Equity
Three months ended March 31, 2001 and 2000
(Dollars in thousands) (Unaudited)
ACCUMULATED
OTHER
COMPREHENSIVE
COMMON RETAINED INCOME
STOCK SURPLUS EARNINGS (LOSS) TOTAL
Balance December 31, 1999 $497 $11,420 $10,473 $(952) $21,438
Other comprehensive income:
Net income 1,024 1,024
Change in fair value of (236) (236)
securities available for
sale, net Comprehensive
income 788
----- ------ ------ ----- ------
Balance March 31, 2000 $497 $11,420 $11,497 $(1,188) $22,226
Balance December 31, 2000 $2,503 $9,859 $10,572 $ (191) $22,743
Stock re-purchase (2) (53) (55)
Other comprehensive income:
Net income 877 877
Change in fair vale of
securities available
for sale, net 581 581
Comprehensive income 1,458
----- ------ ------ ------ ------
Balance March 31, 2001 $2,501 $9,806 $11,449 $ 390 $24,146
6
NOTES TO FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying unaudited financial statements have been prepared by Pacific
Financial Corporation ("Pacific" or the "Company") in accordance with 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, 2001, are not necessarily indicative of the results anticipated for
the year ending December 31, 2001.
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.
SECURITIES HELD TO MATURITY AMORTIZED UNREALIZED FAIR
COST GAINS VALUE
(LOSSES)
March 31, 2001
State and Municipal Securities $ 1,359 -0- 1,359
------ ----- -----
TOTAL $ 1,359 -0- 1,359
SECURITIES AVAILABLE FOR SALE AMORTIZED UNREALIZED FAIR
COST GAINS VALUE
(LOSSES)
March 31, 2001
U.S. Treasury Securities $ 502 3 505
U.S. Government Securities 14,749 187 14,936
State and Municipal Securities 12,105 277 12,382
Corporate Securities 13,534 124 13,658
------ ------ ------
TOTAL $40,890 591 41,481
7
3. Allowance for Credit Losses
THREE MONTHS ENDED
MARCH 31,
2001 2000
Balance at beginning of period $2,026 $1,930
Provision for possible credit losses 102 53
Charge-offs (326) (8)
Recoveries 3 5
Net recoveries (charge-offs) (323) (3)
----- -----
Balance at end of period $1,805 $1,980
4. Computation of Basic Earnings per Share:
THREE MONTHS ENDED
MARCH 31,
2001 2000(1)
Net Income $877,000 $1,024,000
Shares Outstanding,
Beginning of Period 2,503,130 2,483,850
Shares Repurchased During Period Times
Average Time Outstanding (1,108) --
Average Shares Outstanding 2,502,022 2,483,850
Basic Earnings Per Share $.35 $.41
(1) Restated to reflect 5 for 1 stock split effected July 2000.
8
5. Computation of Diluted Earnings Per Share:
THREE MONTHS ENDED
MARCH 31,
2001 2000(1)
Net Income $877,000 $1,024,000
Options Outstanding 191,550 78,550
Proceeds Were Options Exercised $3,984,720 $1,424,485
Average Share Price During Period $23.41 $27.40
Proceeds Divided By Average Share Price 170,214 51,989
Incremental Shares 21,336 26,560
Average Shares Outstanding 2,502,022 2,483,850
Incremental Shares
Plus Outstanding Shares 2,523,358 2,510,410
Diluted Earnings Per Share $.35 $.41
(1) Restated to reflect 5 for 1 stock split effected July 2000.
9
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
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 customers;
2. changes in the interest rate environment may reduce margins;
3. general economic or business conditions, either nationally or
in the state or regions in which we do business, may be less favorable
than expected, resulting in, among other things, a deterioration in credit
quality, including as a result of lower prices in the real estate market,
or a reduced demand for credit;
4. legislative or regulatory changes may adversely affect the
businesses in which we are engaged; and
5. the securities markets may continue to experience a downturn.
Our management believes the forward-looking statements are reasonable;
however, you should not place undue reliance on them. Forward-looking statements
are not guarantees of performance. They involve risks, uncertainties and
assumptions. Many of the factors that will determine our future results and
share value are beyond our ability to control or predict.
Net income. For the three months ended March 31, 2001, Pacific's net income was
$877,000 compared to $1,024,000 for the same period in 2000. The most
significant factor contributing to the decrease was the decrease in net interest
income.
Net interest income. Net interest income for the three months ended March 31,
2001 decreased $100,000, or 3.4% compared to the same period in 2000. This is
due primarily to increased interest expense.
10
Interest income for the three months ended March 31, 2001, increased $136,000,
or 2.8%, compared to the comparable period in 2000. Securities balances
decreased during the three months ended March 31, 2001, as the result of call
options being exercised by the issuer of the securities. Concurrently, interest
bearing deposits with banks and federal funds sold increased. Average total
loans outstanding for the three months ended March 31, 2001 and March 31, 2000
were $176,272,000 and $154,084,000, respectively, or 14.4% higher in 2001.
Interest expense for the three months ended March 31, 2001 increased $236,000,
or 12.3%, compared to the same period in 2000. Average interest-bearing deposit
balances for the three months ended March 31, 2001 and March 31, 2000 were
$185,916,000 and $175,712,000, respectively, while short term borrowings and
federal funds purchased for the periods were $6,663,000 and $8,572,000,
respectively, a decrease of 22.3% over the 2000 period.
Provision and allowance for credit losses. During the three months ended March
31, 2001, $102,000 was provided for possible credit losses, compared to $53,000
provided in the same period in 2000. For the three months ended March 31, 2001,
net charge-offs were $323,000, compared to net charge-offs of $3,000 during the
same period in 2000.
At March 31, 2001, the allowance for credit losses stood at $1,805,000 compared
to $2,026,000 at December 31, 2000, and $1,980,000 at March 31, 2000. The ratio
of the allowance to total loans outstanding was 1.03%, 1.14% and 1.22%,
respectively, at March 31, 2001, December 31, 2000, and March 31, 2000.
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 $3,068,000 at March 31, 2001. This represents 1.75% of total loans,
compared to $3,420,000 or 1.93% at December 31, 2000, and $1,296,000 or .80% at
March 31, 2000. Non-accrual loans at March 31, 2001 totaled $2,744,000 of which
$2,035,000 are secured by real estate. Based on current analysis, management
believes losses associated with non-accrual loans will be minimal.
ANALYSIS OF NON-PERFORMING ASSETS
MARCH 31 DECEMBER 31 MARCH 31
(in thousands) 2001 2000 2000
Accruing loans past due 90 days
or more $324 $292 $978
Non-accrual loans 2,744 3,128 292
Foreclosed real estate 0 0 26
---- ---- ----
TOTAL $3,068 $3,420 $1,296
11
Non-interest income and expenses. Non-interest income for the three months ended
March 31, 2001 decreased $42,000 compared to the same period in 2000. Service
charges on deposit accounts decreased $5,000 and mortgage loan origination fees
increased $3,000 compared to the three months ended March 31, 2000. Gain on sale
of foreclosed real estate was zero for the period ending March 31, 2001 compared
to $31,000 for the same period in 2000. Other operating income for the three
months ended March 31, 2001 decreased $9,000 compared to the same period in
2000.
Non-interest expense for the three months ended March 31, 2001 increased $62,000
compared to the same period in 2000. For the three-month period in 2001,
salaries and benefits increased $33,000 while occupancy expense decreased $6,000
and other expenses increased $35,000, compared to the same period in 2000. The
increase in salaries and benefits was due to normal salary increases for staff.
Costs of $50,000 related to the termination of Director benefit plans as a
result of the 1999 merger were the primary cause of the increase in other
expense.
Income taxes. The federal income tax provision for the three months ended March
31, 2001 was $361,000, a decrease of $106,000 compared to the same period in
2000. The effective tax rate for the 2001 period is 29.2% compared to 31.3% in
2000.
Financial Condition. Total assets were $258,403,000 at March 31, 2001, an
increase of $5,090,000, or 2.0%, over year-end 2000. Loans were $175,526,000 at
March 31, 2001, a decrease of $1,642,000, or .9%, over year-end 2000. Total
deposits were $228,928,000 at March 31, 2001, an increase of $15,417,000, or
7.2%, compared to December 31, 2000.
Loans. Loan detail by category as of March 31, 2001 and December 31, 2000
were as follows:
March 31, December 31,
2001 2000
Commercial and industrial $60,550 $60,617
Agricultural 7,389 8,115
Real estate mortgage 97,427 97,380
Real estate construction 5,666 6,118
Installment 3,498 3,661
Credit cards and other 996 1,277
------ -------
Total Loans 175,526 177,168
Allowance for credit losses (1,805) (2,026)
------ -------
Net Loans $173,721 $175,142
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.
12
Shareholders' equity. Total shareholders' equity was $24,146,000 at March 31,
2001, an increase of $1,403,000, or 6.2%, compared to December 31, 2000. The
increase was due to net income and an increase in the fair value of securities
available for sale. Book value per share increased to $9.66 at March 31, 2001
compared to $9.09 at December 31, 2000. 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 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, as
occurred in the 2001 first quarter, 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, 2001, and believes that there has been no material change since
December 31, 2000.
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 18, 2001, at which the stockholders of the Company voted on and approved
the following:
1. The election of three Class B directors of Pacific Financial Corporation
for terms expiring at the Annual Meeting of Stockholders in 2004.
13
The voting with respect to each of these matters was as follows:
1. Election of Directors
NAME FOR WITHHOLD
Gary C. Forcum 1,715,915 4,150
Robert A. Hall 1,716,440 3,625
Sidney R. Snyder 1,716,440 3,625
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
No exhibits are filed with this report.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter ended March 31, 2001.
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 11, 2001 By: /s/ Dennis A. Long
-------------------
Dennis A. Long
President
By: /s/ John Van Dijk
-------------------
John Van Dijk, Treasurer
(Principal Financial and
Accounting Officer)
14