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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarter ended March 31, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission File Number 000-29829
PACIFIC FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Washington 91-1815009
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
300 East Market Street
Aberdeen, Washington 98520-5244
(360) 533-8870
(Address, including zip code, and telephone number,
including area code, of Registrant's principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days: Yes X No
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes No X
--- ---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Title of Class Outstanding at April 30, 2004
-------------- -----------------------------
Common Stock, par value $1.00 per share 3,173,339 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, 2004 AND DECEMBER 31, 2003 3
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED MARCH 31, 2004 AND 2003 4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2004 AND 2003 5
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS'
EQUITY THREE MONTH PERIODS ENDED MARCH 31, 2004 AND 2003 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 15
ITEM 4. CONTROLS AND PROCEDURES 15
PART II OTHER INFORMATION 16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 16
ITEM 5. OTHER INFORMATION 17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 17
SIGNATURES 18
-2-
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets
(Dollars in thousands)
Pacific Financial Corporation
March 31, 2004 and December 31, 2003
March 31, December 31,
2004 2003
(Unaudited)
Assets
Cash and due from banks $ 12,157 $ 9,280
Interest bearing balances with banks 41 15,392
Federal funds sold -- 5,000
Investment securities available for sale 43,919 57,473
Investment securities held-to-maturity 7,940 7,988
Federal Home Loan Bank stock, at cost 1,723 915
Loans held for sale 1,501 --
Loans 321,581 199,738
Allowance for credit losses 3,466 2,238
-------- --------
Loans, net 318,115 197,500
Premises and equipment 5,291 3,967
Foreclosed real estate 83 98
Accrued interest receivable 1,901 1,275
Cash surrender value of life insurance 8,768 6,193
Goodwill 10,926 --
Intangible assets 993 --
Other assets 1,436 1,634
-------- --------
Total assets $414,794 $306,715
======== ========
Liabilities and Shareholders' Equity
Deposits:
Non-interest bearing $ 59,729 $ 43,862
Interest bearing 278,569 216,938
-------- --------
Total deposits 338,298 260,800
Accrued interest payable 285 234
Short-term borrowings 16,293 --
Long-term borrowings 12,500 14,500
Other liabilities 2,598 5,531
-------- --------
Total liabilities 369,974 281,065
Shareholders' Equity
Common Stock (par value $1); authorized: 3,173 2,522
25,000,000 shares; issued March 31, 2004
-3,173,339 shares; December 31, 2003
-2,521,539 shares
Additional paid-in capital 26,851 10,005
Retained earnings 14,037 12,663
Accumulated other comprehensive income 759 460
-------- --------
Total shareholders' equity 44,820 25,650
-------- --------
Total liabilities and shareholders' equity $414,794 $306,715
======== ========
-3-
Condensed Consolidated Statements of Income
Three months ended March 31, 2004 and 2003
(Dollars in thousands, except per share)
2004 2003
(UNAUDITED) (UNAUDITED)
Interest Income
Loans $4,156 $3,250
Securities held to maturity:
Taxable 30 73
Tax exempt 41 48
Securities available for sale:
Taxable 446 431
Tax-exempt 149 117
Deposits with banks
and federal funds sold 15 3
------ ------
Total interest income 4,837 3,922
Interest Expense
Deposits 748 790
Other borrowings 131 109
------ ------
Total interest expense 879 899
Net Interest Income 3,958 3,023
Provision for credit losses 70 --
------ ------
Net interest income after provision
for credit losses 3,888 3,023
Non-interest Income
Service charges 288 250
Gain on sales of loans 69 --
Mortgage loan origination fees 10 22
Gain (loss) on sale of foreclosed real estate 35 (8)
Gain on sale of investments 3 4
Other operating income 166 176
------ ------
Total non-interest income 571 444
Non-interest Expense
Salaries and employee benefits 1,625 1,140
Occupancy and equipment 302 238
Other 679 532
------ ------
Total non-interest expense 2,606 1,910
Income before income taxes 1,853 1,557
Provision for income taxes 479 445
------ ------
Net Income $1,374 $1,112
====== ======
Earnings per common share:
Basic $ .50 $ .44
Diluted .49 .44
Average shares outstanding:
Basic 2,739,475 2,512,659
Diluted 2,832,866 2,534,640
-4-
Condensed Consolidated Statements of Cash Flows
Three months ended March 31, 2004 and 2003
(Dollars in thousands)
2004 2003
(UNAUDITED) (UNAUDITED)
OPERATING ACTIVITIES
Net income $ 1,374 $ 1,112
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for credit losses 70 --
Depreciation and amortization 120 105
Deferred income tax (benefit) (292) --
Stock dividends received (16) (14)
Origination of loans held for sale (5,929) --
Proceeds of loans held for sale 5,313 286
Gain on sales of loans (69) --
Gain on sale of investment securities (3) (4)
(Gain) loss on sale of foreclosed real estate (35) 8
Increase in accrued interest receivable (232) (147)
Decrease in accrued interest payable (19) (31)
Write-down of foreclosed real estate -- 119
Other (185) (274)
-------- --------
Net cash provided by operating activities 97 1,160
INVESTING ACTIVITIES
Net (increase) decrease in federal funds 5,000 (8,580)
(Increase) decrease in interest bearing
deposits with banks 15,543 (291)
Purchase of securities held to maturity (344) (390)
Purchase of securities available for sale (2,910) (4,423)
Proceeds from maturities of investments held to maturity 381 697
Proceeds from sales of securities available for sale 19,060 2,994
Proceeds from maturities of
securities available for sale 2,498 2,055
Net increase in loans (11,904) (2,669)
Additions to foreclosed real estate - (18)
Proceeds from sales of foreclosed real estate 93 534
Additions to premises and equipment (327) (11)
Purchase of bank owned life insurance (2,500) --
Acquisition, net of cash received 3,146 --
-------- --------
Net cash provided by (used in) investing activities 27,736 (10,102)
-5-
FINANCING ACTIVITIES
Net increase (decrease) in deposits (10,592) 10,104
Net decrease in short-term borrowings (9,040) (1,800)
Proceeds from issuance of long-term debt -- 2,500
Repayments of long-term debt (2,000) --
Stock options exercised 206 --
Payment of dividends (3,530) (3,392)
-------- --------
Net cash provided by (used in) financing activities (24,956) 7,412
Net increase (decrease) in cash and due from banks $ 2,877 $ (1,530)
CASH AND DUE FROM BANKS
Beginning of period $ 9,280 $ 8,473
End of period $ 12,157 $ 6,943
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for:
Interest $ 828 $ 930
Income Taxes 72 375
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES
Foreclosed real estate acquired in settlement of loans $ (43) $ (1,069)
Financed sale of foreclosed real estate -- 54
Change in fair value of securities available
for sale, net of tax 299 100
Tax benefit from exercise of stock options 9 --
Common stock issued upon business combination 17,282 --
-6-
Condensed Consolidated Statements of Shareholders' Equity
Three months ended March 31, 2004 and 2003
(Dollars in thousands) (Unaudited)
ACCUMULATED
OTHER
ADDITIONAL COMPREHENSIVE
COMMON PAID-IN RETAINED INCOME
STOCK CAPITAL EARNINGS (LOSS) TOTAL
Balance December 31, 2002 $ 2,513 $ 9,839 $11,614 $ 717 $24,683
Other comprehensive income:
Net income 1,112 1,112
Change in fair value of
securities available for sale, net 100 100
Comprehensive income 1,212
------- ------- ------- ------ -------
Balance March 31, 2003 $ 2,513 $ 9,839 $12,726 $ 817 $25,895
Balance December 31, 2003 $ 2,522 $10,005 $12,663 $ 460 $25,650
Issuance of common stock 636 16,646 17,282
Stock options exercised 15 191 206
Tax benefit from exercise of options 9 9
Other comprehensive income:
Net income 1,374 1,374
Change in fair value of 299 299
securities available for sale, net
Comprehensive income 1,673
------- ------- ------- ------ -------
Balance March 31, 2004 $ 3,173 $26,851 $14,037 $ 759 $44,820
-7-
NOTES TO FINANCIAL STATEMENTS
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, 2004, are
not necessarily indicative of the results anticipated for the year ending
December 31, 2004. Certain information and footnote disclosures included in the
Company's consolidated financial statements for the year ended December 31,
2003, 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, 2003 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.
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, 2004
U.S. Government Securities $ 2,570 $ 59 $ -- $ 2,629
State and Municipal Securities 5,370 132 -- 5,502
------- ------ ---- -------
TOTAL $7,940 $ 191 $ -- $ 8,131
SECURITIES AVAILABLE FOR SALE AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
March 31, 2004
U.S. Government Securities $19,532 $345 -- $19,877
State and Municipal Securities 15,193 685 -- 15,878
Corporate Securities 4,116 168 -- 4,284
Mutual Funds 3,929 -- (49) 3,880
------- ------ ---- -------
TOTAL $42,770 $1,198 $(49) $43,919
-8-
3. Allowance for Credit Losses
THREE MONTHS ENDED TWELVE MONTHS ENDED
MARCH 31, DECEMBER 31,
2004 2003 2003
Balance at beginning of period $2,238 $2,473 $2,473
BNW Bancorp, Inc. acquisition 1,172 -- --
Provision for possible credit losses 70 -- --
Charge-offs (19) (120) (265)
Recoveries 5 1 30
------ ------ ------
Net recoveries (charge-offs) (14) (119) (235)
------ ------ ------
Balance at end of period $3,466 $2,354 $2,238
Ratio of net charge-offs to
average loans outstanding .01% .06% .12%
4. Computation of Basic Earnings per Share:
THREE MONTHS ENDED
MARCH 31,
2004 2003
Net Income $1,374,000 $1,112,000
Average Shares Outstanding 2,739,475 2,512,659
Basic Earnings Per Share $ .50 $ .44
5. Computation of Diluted Earnings Per Share:
THREE MONTHS ENDED
MARCH 31,
2004 2003
Net Income $1,374,000 $1,112,000
Average Shares Outstanding 2,739,475 2,512,659
Effect of dilutive securities 93,391 21,981
Average Shares Outstanding and
Assumed conversion of dilutive
Stock options 2,832,866 2,534,640
Diluted Earnings Per Share $ 0.49 $ 0.44
-9-
6. Equity Compensation Plans
At March 31, 2004, 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,
2004 2003
Net Income, as reported $1,374,000 $1,112,000
Less total stock-based compensation
expense determined under fair value
method for all qualifying awards 25,000 21,000
---------- ----------
net of related taxes
Pro forma net income $1,349,000 $1,091,000
Earnings per Share
Basic:
As reported $ .50 $ .44
Pro forma .49 .43
Diluted:
As reported $ .49 $ .44
Pro forma .48 .43
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 636,562 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 $10,926,000. As part of
the accounting for the acquisition, the Company recorded an identifiable
intangible asset. A core deposit intangible of $993,000 was recorded.
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 purchase fair
value is greater than the current value, the implied value of the goodwill will
be analyzed against the carrying value of the goodwill. Any noted impairment
losses will be taken at that time.
The core deposit intangible recorded as part of the acquisition has an estimated
life of seven years. Estimated amortization expense will be approximately
$118,000 for the year ended December 31, 2004 and $142,000 for the years ended
December 31, 2005 through 2010 and $23,000 for the year ended December 31, 2011.
-10-
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 that 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 that may reduce margins
or decrease the value of our securities;
3. our recent acquisition of BNW Bancorp may be dilutive to earnings
per share if we do not realize expected cost savings or successfully
integrate BNW Bancorp into the Company 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 that 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 are
reasonable; however, you should not place undue reliance on them.
Forward-looking statements are not guarantees of performance. They involve
risks, uncertainties and assumptions. Many of the factors that will
determine our future results and share value are beyond our ability to
control or predict. We undertake no obligation to update forward-looking
statements.
Net income. For the three months ended March 31, 2004, Pacific's net income was
$1,374,000 compared to $1,112,000 for the same period in 2003. The most
significant factor contributing to the increase was the acquisition of BNW
Bancorp, Inc. ("BNW") effective as of the close of business on February 27,
2004. We expect the BNW acquisition to continue to have a significant effect on
net income in the second quarter, which will be the first full quarter
reflecting key results of the combined enterprise.
Net interest income. Net interest income for the three months ended March 31,
2004 increased $935,000, or 30.9%, compared to the same period in 2003. This is
due primarily to increased interest income from loans and the effect of the BNW
acquisition at the end of February 2004.
The Company acquired $109,569,000 of net loans as part of the BNW acquisition.
The portfolio consisted of approximately $79,700,000 in real estate loans,
$25,600,000 in commercial loans and $4,269,000 in consumer loans; the average
yield on the portfolio was approximately 6.96% at March 31, 2004.
-11-
Interest income for the three months ended March 31, 2004, increased $915,000,
or 23.3%, compared to the comparable period in 2003. Average total loans
outstanding for the three months ended March 31, 2004, and March 31, 2003, were
$242,892,000, and $186,953,000, respectively, or an increase of 29.9% in 2004
over 2003.
Interest expense for the three months ended March 31, 2004 decreased $20,000, or
2.2%, compared to the same period in 2003. Average interest-bearing deposit
balances for the three months ended March 31, 2004 and March 31, 2003 were
$234,855,000 and $189,499,000, respectively, representing an increase of 23.9%
compared to last year's period. The increase is attributable primarily to the
BNW acquisition closed February 27, 2004. The Company acquired deposits valued
at $88,853,000 as part of the acquisition. The deposit composition consists of
approximately $15,600,000 in non-interest bearing accounts, $33,800,000 in
certificates of deposit, and approximately $39,400,000 in other savings deposits
with an average cost of total deposits of 1.39%.
Average short term borrowings and federal funds purchased for the periods were
$21,418,000 and $1,542,000, respectively, a combined increase of 128.9% over the
2003 period. The increase was applied primarily to funding the loan commitments
outstanding for the BNW acquisition. Average long term borrowings for the three
months ended March 31, 2004 were $13,919,000 compared to $11,806,000 for the
same period in 2003.
Provision and allowance for credit losses. The allowance for credit losses
reflects management's current estimate of the amount required to absorb losses
on existing loans and commitments to extend credit. Loans deemed uncollectible
are charged against and reduce the allowance. Periodically, a provision for
credit losses is charged to current expense. This provision acts to replenish
the allowance for credit losses and to maintain the allowance at a level that
management deems adequate.
There is no precise method of predicting specific credit losses or amounts that
ultimately may be charged off on segments of the loan portfolio. The
determination that a loan may become uncollectible, in whole or in part, is a
matter of judgment. Similarly, the adequacy of the allowance for credit losses
can be determined only on a judgmental basis, after full review, including (a)
consideration of economic conditions and the effect on particular industries and
specific borrowers; (b) a review of borrowers' financial data, together with
industry data, the competitive situation, the borrowers' management capabilities
and other factors; (c) a continuing evaluation of the loan portfolio, including
monitoring by lending officers and staff credit personnel of all loans which are
identified as being of less than acceptable quality; (d) an in-depth appraisal,
on a monthly basis, of all loans judged to present a possibility of loss (if, as
a result of such monthly appraisals, the loan is judged to be not fully
collectible, the carrying value of the loan is reduced to that portion
considered collectible); and (e) an evaluation of the underlying collateral for
secured lending, including the use of independent appraisals of real estate
properties securing loans. A formal analysis of the adequacy of the allowance is
conducted quarterly and is reviewed by the Board of Directors. Based on this
analysis, management considers the allowance for credit losses to be adequate at
March 31, 2004.
-12-
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 10K for the year ended December 31, 2003.
During the three months ended March 31, 2004, a provision of $70,000 was
provided for possible credit losses, compared to no provision in the same period
in 2003. For the three months ended March 31, 2004, net charge-offs were
$19,000, compared to net charge-offs of $119,000 during the same period in 2003,
and compared to $235,000 in net charge-offs during the twelve months ended
December 31, 2003.
At March 31, 2004, the allowance for credit losses stood at $3,466,000 compared
to $2,238,000 at December 31, 2003, and $2,354,000 at March 31, 2003.
Approximately $1,172,000 of this increase was attributable to the BNW
acquisition. The ratio of the allowance to total loans outstanding was 1.08%,
1.12% and 1.26%, respectively, at March 31, 2004, December 31, 2003, and March
31, 2003.
Non-performing assets and foreclosed real estate owned. Non-performing assets
totaled $1,633,000 at March 31, 2004. This represents .51% of total loans,
compared to $563,000 or .27% at December 31, 2003, and $5,083,000 or 2.72% at
March 31, 2003. The increase during the period ended March 31, 2004, is due
primarily to the increase in non-accrual loans, involving a USDA guaranteed
commercial loan. The decrease compared to the period ended March 31, 2003, is
due to a non-accrual real estate loan totaling $3,587,000 which is now
performing according to the loan terms, and the sale of various foreclosed real
estate owned properties. Non-accrual loans at March 31, 2004 totaled $1,547,000
of which $1,016,000 are guaranteed by the U.S. Government. Based on current
analysis, management believes losses associated with non-accrual loans will be
minimal. 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) 2004 2003 2003
Accruing loans past due 90 days or more $ 3 $ -- $ --
Non-accrual loans 1,547 465 4,025
Foreclosed real estate 83 98 1,058
------ ---- ------
TOTAL $1,633 $563 $5,083
-13-
Non-interest income and expense. Non-interest income for the three months ended
March 31, 2004 increased $127,000 compared to the same period in 2003. Service
charges on deposit accounts increased $38,000 compared to the three months ended
March 31, 2003, while loan origination fees decreased $12,000. Gain on sale of
loans totaled $69,000 and gain on the sale of foreclosed real estate owned
increased $43,000. Prior to 2004, the Company did not sell loans into the
secondary market. However, a real estate 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 to
limit any potential price risk.
Non-interest expense for the three months ended March 31, 2004 increased
$485,000 compared to the same period in 2003. The BNW acquisition was the major
contributing factor to increased non-interest expense, with $478,000
representing incremental increases in operating expense for March and $8,000
relating to expenses incurred in connection with the acquisition.
Income taxes. The federal income tax provision for the three months ended March
31, 2004 was $479,000, an increase of $34,000 compared to the same period in
2003.
Financial Condition. Total assets were $414,794,000 at March 31, 2004, an
increase of $108,079,000, or 35.2%, over year-end 2003. Loans were $323,082,000
at March 31, 2004, an increase of $123,344,000, or 61.7%, over year-end 2003.
Total deposits were $338,298,000 at March 31, 2004, an increase of $77,498,000,
or 29.7%, compared to December 31, 2003. Increases in assets, loans and deposit
balances were primarily the result of the BNW acquisition, although the Company
did see growth in each category in its historical markets.
Loans. Loan detail by category, including loans held for sale, as of March 31,
2004 and December 31, 2003 follows:
March 31, December 31,
2004 2003
Commercial and industrial $ 86,739 $ 59,665
Agricultural 14,488 4,679
Real estate mortgage 172,694 117,940
Real estate construction 38,989 11,894
Installment 7,022 4,625
Credit cards and other 3,150 935
-------- --------
Total Loans 323,082 199,738
Allowance for credit losses (3,466) (2,238)
-------- --------
Net Loans $319,616 $197,500
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. It generally has been a net
seller of federal funds. When necessary, liquidity can be increased by taking
advances available from the Federal Home Loan Bank of Seattle.
Shareholders' equity. Total shareholders' equity was $44,820,000 at March 31,
2004, an increase of $19,170,000, or 74.7%, compared to December 31, 2003. The
increase was due to net income and the acquisition and merger of BNW Bancorp,
Inc. into the Company effective February 27, 2004, which was accounted for as a
purchase transaction. Tangible book value per share was $10.11 at March 31, 2004
compared to $10.17 at December 31, 2003. 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. 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, 2004, and believes that there has been no material change since
December 31, 2003.
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Pacific Financial Corporation held a Special Meeting of Shareholders on February
24, 2004, at which the shareholders of the Company voted on and approved the
Agreement and Plan of Merger dated October 22, 2003. The voting with respect to
this matter was as follows:
FOR AGAINST ABSTAIN
1,761,104 38,410 8,995
Pacific held its Annual Meeting of Shareholders on April 28, 2004, at which the
shareholders of the Company voted on and approved the following:
1. The election of one Class A director (Randy Rust) for a two year term,
four Class B directors (G. Dennis Archer, Gary C. Forcum, Susan C.
Freese and Douglas M. Schermer) for a three year term, and two Class C
directors (John R. Ferlin and Stewart L. Thomas) for a one year term.
The voting with respect to each of these matters was as follows:
1. Election of Directors
NAME FOR WITHHOLD
G. Dennis Archer 2,139,032 35,625
John R. Ferlin 2,173,447 1,210
Gary C. Forcum 2,140,242 34,415
Susan C. Freese 2,135,776 38,881
Randy Rust 2,174,392 265
Douglas M. Schermer 2,140,242 34,415
Stewart L. Thomas 2,173,182 1,475
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ITEM 5. OTHER INFORMATION
On February 27, 2004, the Company consummated the acquisition of BNW Bancorp,
Inc. ("BNW"), the holding company for Bank NorthWest headquarted in Bellingham,
Washington, by means of a merger of BNW into the Company. In addition, Bank
NorthWest, the banking subsidiary of BNW, merged into the Company's banking
subsidiary, the Bank of the Pacific.
In the merger, the Company issued 0.85 shares of the Company's common stock in
exchange for each share of BNW common stock surrendered in the transaction. 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
$11,919,000.
The following unaudited pro forma financials for the three months ended March
31, 2004 and 2003 assumes that the BNW acquisition occurred as of January 1,
2003, after giving effect to certain adjustments. The pro forma results have
been prepared for comparative purposes only and are not necessarily indicative
of the results of operations which may occur in the future or that would have
occurred had the BNW acquisition been consummated on the date indicated.
Pro Forma Financial Information for the
Three Months Ended March 31,
2004 2003
-------------------------------
(in thousands)
Net Interest Income $ 4,848 $ 4,116
Non-interest Income 684 772
Non-interest Expense 4,604 3,062
Net Income 279 1,220
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
See Exhibit Index immediately following signatures below.
(b) Reports on Form 8-K:
During the three months ended March 31, 2004, Pacific filed the
following current reports on Form 8-K:
Report on Form 8-K dated January 13, 2004, filing the Company's
definitive form of proxy card for use at the Company's special meeting of
shareholders February 24, 2004.
Report on Form 8-K dated March 1, 2004, reporting Pacific's completed
merger with BNW Bancorp, Inc. effective February 27, 2004.
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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 12, 2004 By: /s/ Dennis A. Long
------------------
Dennis A. Long
President
By: /s/ John Van Dijk
------------------
John Van Dijk, Secretary/Treasurer
(Principal Financial and
Accounting Officer)
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Exhibit Index
EXHIBIT NO. EXHIBIT
- ----------- -------
31.1 Certification of CEO under Rule 13a - 14(a)
31.2 Certification of CFO under Rule 13a - 14(a)
32 Certifications of CEO and CFO under 18 U.S.C. Section 1350
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