Washington, D.C. 20549

 

Form 10-Q

 

 

Commission File Number 000-32385

 

 

 

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 ý               No o

 

The number of shares outstanding of the issuer’s classes of common equity as of July 31, 2002:

 

Common Stock - no par value, 3,260,368 shares outstanding

 

 

Table of Contents

 

PART I – FINANCIAL INFORMATION
	Item 1		Financial Statements
		Condensed Consolidated Balance Sheet – June 30, 2002 and December 31, 2001
		Condensed Consolidated Statement of Income – Three Months and Six Months Ended June 30, 2002 and 2001
		Condensed Consolidated Statement of Cash Flows – Six Months Ended June 30, 2002 and 2001
		Notes to Condensed Consolidated Financial Statements
	Item 2		Management's Discussion and Analysis of Financial Condition and Results of Operations
	Item 3		Quantitative and Qualitative Disclosure about Market Risk
PART II – OTHER INFORMATION
	Item 4		Submission of Matters to a Vote of Security Holders
	Item 6		Exhibits and Reports on Form 8-K
			Signatures

 

i

 

PACIFICA BANCORP, INC.

CONDENSED CONSOLIDATED BALANCE SHEET

 

		June 30, 2002			December 31, 2001
(Dollars in thousands)		(Unaudited)			(Audited)
ASSETS
Cash and due from banks		$	1,950		$	2,559
Interest-bearing cash		23,788			25,497
Federal funds sold		3,090			3,300
Total cash and cash equivalents		28,828			31,356
Interest-bearing deposits in other banks		807			857
Securities available-for-sale, at fair value		20,172			33,177
Federal Home Loan Bank stock, at cost		281			273
Total investments		21,260			34,307
Loans		111,547			105,878
Less allowance for loan losses		(3,996		)	(3,530		)
Total loans, net		107,551			102,348
Premises and equipment, net		2,609			2,126
Accrued interest receivable		747			994
Other		1,102			233
Total other assets		4,458			3,353
TOTAL ASSETS		$	162,097		$	171,364
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits
Noninterest-bearing		$	10,021		$	13,187
Interest-bearing		136,694			142,782
Total deposits		146,715			155,969
Accrued interest payable		1,503			1,983
Other accrued liabilities		162			297
Other borrowings		1,833			1,318
Total other liabilities		3,498			3,598
Total liabilities		150,213			159,567
SHAREHOLDERS’ EQUITY
Preferred stock, no par value, 3,000,000 shares authorized; none issued or outstanding		—			—
Common stock, no par value, 10,000,000 shares authorized, 3,260,368 shares issued and outstanding at June 30, 2002 and December 31, 2001		16,054			16,054
Accumulated deficit		(4,143		)	(4,365		)
Accumulated other comprehensive income, net of tax		(27		)	108
Total shareholders’ equity		11,884			11,797
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY		$	162,097		$	171,364

 

See accompanying notes to these financial statements.

 

1

 

PACIFICA BANCORP, INC.

CONDENSED CONSOLIDATED STATEMENT OF INCOME

(Unaudited)

 

		Three Months Ended June 30,						Six Months Ended June 30,
(Dollars in thousands, except for per share data)		2002			2001			2002			2001
INTEREST INCOME
Loans, including fees		$	2,121		$	2,686		$	4,147		$	5,460
Investments and interest-bearing deposits		477			455			903			942
Federal funds sold		14			37			27			88
Total interest income		2,612			3,178			5,077			6,490
INTEREST EXPENSE
Deposits		1,092			1,858			2,306			3,661
Borrowings		28			2			49			6
Total interest expense		1,120			1,860			2,355			3,667
NET INTEREST INCOME		1,492			1,318			2,722			2,823
PROVISION FOR LOAN LOSSES		(500		)	950			(500		)	1,794
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		1,992			368			3,222			1,029
NONINTEREST INCOME
Loan commissions and other related income		232			183			433			280
Service fees		31			26			53			54
Other income		104			106			199			212
Gain on sale of securities and derivatives		28			1,238			28			1,662
Total noninterest income		395			1,553			713			2,208
NONINTEREST EXPENSES
Salaries and employee benefits		1,163			808			2,249			1,662
Occupancy and equipment		299			216			590			433
Other expenses		444			478			874			894
Total noninterest expenses		1,906			1,502			3,713			2,989
INCOME BEFORE INCOME TAXES		481			419			222			248
INCOME TAXES		—			—			—			—
NET INCOME		$	481		$	419		$	222		$	248
Net income per share of common stock:
Basic		$	0.15		$	0.13		$	0.07		$	0.08
Diluted		$	0.14		$	0.11		$	0.06		$	0.07
Weighted average number of shares outstanding:
Basic		3,260,368			3,265,608			3,260,368			3,264,745
Diluted		3,367,839			3,670,641			3,424,125			3,666,419

 

See accompanying notes to these financial statements.

 

2

 

PACIFICA BANCORP, INC.

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(Unaudited)

 

		Six Months Ended June 30,
(Dollars in thousands)		2002			2001
CASH FLOWS FROM OPERATING ACTIVITIES
Net income		$	222		$	248
Adjustments to reconcile net income to net cash flows from operating activities
Provision for loan losses		(500		)	1,794
Net amortization (accretion) of securities		69			(25		)
Realized (gain)/loss on sale of available-for-sale securities, net		(28		)	(899		)
Realized (gain)/loss on sale of derivatives		—			(763		)
Federal Home Loan Bank stock dividends		(8		)	(9		)
Depreciation		223			217
Changes in operating assets and liabilities
Interest receivable		247			(16		)
Other assets		31			(31		)
Interest payable		(480		)	459
Other liabilities		(79		)	(15		)
Net cash flows from operating activities		(303		)	960
CASH FLOWS FROM INVESTING ACTIVITIES
Net change in interest-bearing deposits in banks		50			(293		)
Purchases of available-for-sale investment securities		(30,005		)	(32,392		)
Proceeds from sales, maturities and principle payments of available-for-sale securities		42,765			34,082
Proceeds from sale of derivatives		—			763
Net change in loans made to customers		(5,590		)	(11,363		)
Additions to premises and equipment		(706		)	(271		)
Net cash flows from investing activities		6,514			(9,474		)
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in noninterest-bearing deposits		(3,166		)	707
Increase (decrease) in interest-bearing deposits		(6,088		)	19,412
Increase (decrease) in other borrowings		515			234
Proceeds from sale of common stock		—			37
Net cash flows from financing activities		(8,739		)	20,390
NET CHANGE IN CASH AND CASH EQUIVALENTS		(2,528		)	11,876
CASH AND CASH EQUIVALENTS, beginning of period		31,356			12,429
CASH AND CASH EQUIVALENTS, end of period		$	28,828		$	24,305
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for interest		$	2,835		$	3,208

 

See accompanying notes to these financial statements.

 

3

 

PACIFICA BANCORP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Pacifica Bancorp, Inc. (“Pacifica” or the “Company”) is a bank holding company with two subsidiaries, Pacifica Bank (the “Bank”) and Pacifica Mortgage Company (“Pacifica Mortgage”).  The Company was organized under the laws of the State of Washington in October 2000 and is headquartered in Bellevue, Washington.

 

NOTE 1.  BASIS OF PRESENTATION

 

The interim unaudited consolidated financial statements have been prepared 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 generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments consisting only of normal recurring accruals necessary for a fair presentation of the financial condition and the results of operations for the interim periods included herein have been made.  Operating results for the three months and six months ended June 30, 2002 are not necessarily indicative of the results to be anticipated for the year ending December 31, 2002.  Certain amounts in the 2001 financial statements have been reclassified to conform to the 2002 presentation.  For additional information, refer to the audited financial statements and notes thereto included in Pacifica’s annual report on Form 10-KSB for the year ended December 31, 2001.

 

The condensed consolidated financial statements include the accounts of Pacifica Bancorp, Inc. and its wholly-owned subsidiaries, Pacifica Bank and Pacifica Mortgage Company.  All significant intercompany accounts and transactions have been eliminated in consolidation.

 

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, as of the date of the balance sheet, and revenues and expenses for the period. Actual results could differ from estimated amounts.

 

NOTE 2.  EARNINGS PER SHARE

 

Basic earnings per share amounts are computed based on the weighted average number of shares outstanding during the period. Diluted earnings per share are computed by determining the number of additional shares that are deemed outstanding due to stock options under the treasury stock method. However, potentially dilutive shares are not considered in reporting earnings per share when the addition of such shares would be considered antidilutive or if the Company had a net loss.

 

NOTE 3.  INCOME TAXES

 

Because of unused net operating losses and preopening expenses, Pacifica has not recognized a tax provision within the statement of operations.

 

NOTE 4.  RECOVERY ON CHARGED-OFF CREDIT

 

In October 2001, the Company filed a bond claim of approximately $2.5 million with its insurance company in connection with a previously charged-off credit.  During the second quarter of 2002, the Company reached a partial release and assignment agreement with the insurance company and received a payment of  $887,000.  There is no assurance that the Company will be able to collect any additional payments on this claim from the insurance company.

 

4

 

NOTE 5.  PREFERRED STOCK ISSUANCE

 

In an effort to raise new capital and provide continued growth, the Company is in the process of offering up to 8,000 shares of a combination of Series A-1 Perpetual Cumulative Preferred Stock and Series A-2 Five-Year Cumulative Mandatory Redeemable Preferred Stock (the “Series A Preferred”), at $1,000 per share, in a private placement to accredited investors, sophisticated investors, and non-U.S. persons. The Series A-1 Perpetual Cumulative Preferred Stock pays an initial annual cash dividend of 9.8% adjusted bi-annually to the equivalent of the current U.S. 30-year Treasury Bond yield + 400 basis points. The Series A-2 Five-Year Cumulative Mandatory Redeemable Preferred Stock pays an initial annual cash dividend of 8.8% adjusted bi-annually to the equivalent of the current U.S. 30-year Treasury Bond yield + 300 basis points. The first bi-annual adjustment will occur in January 2003. The Series A Preferred Stock will be entitled to receive a liquidation amount equal to the original purchase price, plus any accrued but unpaid dividends. Neither class of Series A Preferred are entitled to voting privelages, excpet for certain matters relating to the Company’s Articles of Incorporation. The limited life preferred stock will be accounted for as subordinated debt while the perpetual preferred stock will be accounted for as equity capital. The Company closed $250,000 in sales of its Series A-1 preferred stock and $1.4 million in Series A-2 preferred stock offering in July 2002.  The Company anticipates that the proceeds of this offering will be applied to contribute to the Bank’s capital, to pay the currently outstanding advances on the Company’s commercial line of credit, to reserve for the first two-years’ dividends due on the Series A Preferred Stock, and to provide for future acquisition and growth opportunities.

 

5

 

PACIFICA BANCORP, INC.

ITEM 2  .MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

This discussion should be read in conjunction with the unaudited condensed consolidated financial statements of Pacifica Bancorp, Inc. (“Pacifica” or the “Company”) and notes thereto presented elsewhere in this report.

 

Note regarding Forward-Looking Statements:  This Form 10-Q includes” forward-looking statements” as that term is defined in the Private Securities Litigation Reform Act of 1995. 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 Securities Exchange Act of 1934, as amended, 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.  These risks and uncertainties include our ability to maintain or expand our market share or net interest margins, and 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; general trends in the local, regional and national banking industry, and the events of September 11, 2001 and its aftermath, as well as any further similar events.  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 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.

 

Overview

 

The Company is a bank holding company with two wholly-owned subsidiaries, Pacifica Bank (the “Bank”) and Pacifica Mortgage Company (“Pacifica Mortgage”).  The Company was organized under the laws of the State of Washington in October 2000 and became the parent company of the Bank on January 1, 2001 pursuant to a Plan and Agreement of Reorganization (the “Plan”).  Under the Plan, the Company issued 3,258,208 shares of common stock in exchange for all outstanding shares of Pacifica Bank stock (1,629,104 shares), using a 2-for-1 ratio.

 

Pacifica’s main office, from which it conducts both banking and mortgage operations and administrative functions, is located in the central business district of Bellevue, Washington, approximately 10 miles from Seattle.  Pacifica’s Seattle office, where its banking and mortgage operations reside, was opened in December 2001 and is located in the downtown/International District of Seattle.  The Company’s primary market area is King County, Washington, and the Company also attracts customers from greater Seattle and communities along the I-5 corridor from Everett to Tacoma, Washington.  Pacifica’s market area has undergone significant business diversification, and the regional economy has generally experienced strong growth and stability through 2000, although a distinct slowdown in the regional economy occurred in 2001 and continued through the first six months of 2002.  The region’s growth and recovery is expected to be slow through 2002 and into 2003.

 

6

 

Pacifica Bank is a Washington state-chartered commercial bank, the deposits of which are insured by the Federal Deposit Insurance Corporation (the “FDIC”).  The Bank commenced banking operations in October 1998 and conducts a full range of commercial banking services. The Bank targets small to mid-sized businesses, professionals, various Asian communities and companies doing business in Asia for commercial banking services because it believes that these groups may be currently under-served by other financial institutions.

 

Pacifica Mortgage, another wholly-owned subsidiary of Pacifica, was incorporated on January 18, 2001 and offers a variety of residential loan options to the residents of our service area.

 

Pacifica’s mission is to exceed customer, shareholder and community expectations in dedication, professionalism and innovation.  The Company continuously reviews products and services in order to provide its customers more service options and better quality. We successfully launched our Internet online banking service in December 2001 and our Online Bill Pay service is expected to be available to customers in the third quarter of 2002. Further growth through branch expansion or acquisition into other geographic and product line markets may also be considered as new opportunities arise. In addition, recent banking legislation allows affiliations among securities, insurance, banking and other financial companies and provides for the creation of financial holding companies and financial subsidiaries.  However, Pacifica is not currently eligible for financial holding company status owing to its current regulatory status as described below.

 

Supervisory Directive

 

As the result of a recent examination by the FDIC and the Washington State Department of Financial Institutions, Division of Banks (the “Department”), the Bank is subject to a Supervisory Directive dated March 27, 2002. The Supervisory Directive addresses a number of issues related to our growth and loan quality, by

 

•                    temporarily limiting the Bank’s ability to pay dividends to the bank holding company other than those necessary to service existing holding company debt;

 

•                  temporarily limiting the Bank’s maximum asset size to $180 million;

 

•                    requiring our Tier 1 Leverage Capital ratio to be maintained at a level that would be typically required for a de novo bank (a newly chartered bank with less than five years of operations); and

 

•                  requiring the Bank to reduce classified loans by a specified amount before December 31, 2002.

 

The regulators have informed us that the Supervisory Directive would remain in place until we have met the requirements of the directive, including but not limited to reduction of classified loans as stated above. The Board of Directors and the management have set a goal to meet the requirements of the Supervisory Directive by the end of 2002.  Management has prepared action plans, formed an Asset Quality Committee, and has taken other steps to improve credit quality, monitor capital ratios, maximize earnings, and promote stability.  For the second quarter of 2002, the Bank’s Tier 1 Leverage Capital ratio exceeded the level required for a de novo bank.  We have reduced the amount of classified assets identified by the FDIC as of September 30, 2001 by 33% and have met the requirements set forth in the Supervisory Directive regarding classified assets for July 31, 2002.  All other requirements that need to be met as of July 31, 2002 have been met.

 

We expect our rate of growth to slow from the high rate experienced in the first three years of operations, as our focus shifts to improving asset quality, increasing earnings and growing capital. We do not expect the limitations of the Supervisory Directive to reduce our ability to achieve our planned rate of growth in 2002.

 

7

 

We intend to grow our total assets to $180 million by year-end 2002.  We anticipate adding approximately $25 million in loans, with $15 million to be funded by new deposits and $10 million from our existing investment portfolio.  The Company hired new lending officers and expanded its office presence into Seattle, which has increased loan volume.

 

Preferred Stock

 

In order to provide for continued growth of the Company, Pacifica’s management has considered various ways to raise new capital, including the issuance of preferred stock and/or trust preferred securities.  The  Company is currently in the process of offering up to 8,000 shares of a combination of Series A-1 Perpetual Cumulative Preferred Stock and Series A-2 Five-Year Cumulative Mandatory Redeemable Preferred Stock (the “Series A Preferred”), at $1,000 per share, in a private placement to accredited investors, sophisticated investors, and non-U.S. persons.  The Series A-1 Perpetual Cumulative Preferred Stock pays an initial annual cash dividend of 9.8% adjusted bi-annually to the equivalent of the current U.S. 30-year Treasury Bond yield + 400 basis points. The Series A-2 Five-Year Cumulative Mandatory Redeemable Preferred Stock pays an initial annual cash dividend of 8.8% adjusted bi-annually to the equivalent of the current U.S. 30-year Treasury Bond yield + 300 basis points. The first bi-annual adjustment will occur in January 2003. The Series A Preferred Stock will be entitled to receive a liquidation amount equal to the original purchase price, plus any accrued but unpaid dividends. Neither class of Series A Preferred are entitled to voting privelages, excpet for certain matters relating to the Company’s Articles of Incorporation. The limited life preferred stock will be accounted for as subordinated debt while the perpetual preferred stock will be accounted for as equity capital. The Company closed $250,000 in sales of its Series A-1 preferred stock and $1.4 million in Series A-2 preferred stock offering in July 2002.  The Company anticipates that the proceeds of this offering will be applied to contribute to the Bank’s capital, to pay the currently outstanding advances on the Company’s commercial line of credit, to reserve for the first two-years’ dividends due on the Series A Preferred Stock, and to provide for future acquisition and growth opportunities.

 

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 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 shareholders’ equity. 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 mortgage loan commissions, discount and rebate income, service charges, international service fees and other sources. The primary components of Pacifica’s operating expenses are compensation and employee benefits expense, and occupancy expense.

 

Net Income

 

Average earning assets grew to $161.1 million for the second quarter of 2002, up 4% from $154.6 million for the same period of 2001.  During the quarter ended June 30, 2002, net interest margin increased to 3.70%, as compared to 3.41% for the same period of 2001.  In addition, we reduced our allowance for loan losses by $500,000 as of June 30, 2002 to lower the amount of excess reserve in the allowance account.  Pacifica reported a net income of $481,000, or $0.14 per diluted share for the second quarter of 2002, up 15% from a net income of $419,000 or $0.11 per diluted share for the same period of 2001.  The increase was due primarily to the reduction in allowance for loan loss reserve.

 

8

 

For the six months ended June 30, 2002, average earning assets increased by 10% to  $163.0 million, from $148.6 million for the same period of 2001. During the six months ended June 30, 2002, net interest margin decreased to 3.33%, as compared to 3.80% for the same period of 2001.  Net income was $222,000, or $0.06 per diluted share for the first six months of 2002, down 10% from a net income of $248,000 or $0.07 per diluted share for the same period of 2001. The decrease was due primarily to the lower net interest margin and the loss resulting from the early stage operations and office expansions of Pacifica Mortgage and the Bank’s Seattle Office. As a result, occupancy and equipment expenses were much higher in the first six months of 2002 than the same period of last year due to the increases in lease payments and depreciation expenses. On the other hand, lower than expected loan production has generated less mortgage fee income and interest income from the Bank than anticipated in the first six months of 2002.  The Company has recently hired an executive with over 25 years of management experience in the mortgage lending industry as the new president of Pacifica Mortgage.  The Company has experienced loan growth due to the addition of new loan officers. Management is currently working to add more members to its lending team to increase loan production.

 

Net Interest Income

 

Abbreviated average balance sheet and net interest income data for the periods are shown below:

 

		For the Three Months Ended June 30,											For the Six Months Ended June 30,
(Dollars in thousands)		2002			2001			$ Change			% Change		2002			2001			$ Change			% Change
Loans		$	106,974		$	116,176		$	(9,202	)	-8	%	$	106,827		$	112,434		$	(5,607	)	-5	%
Interest-bearing deposits in other banks		21,791			19,336			2,455			13	%	21,809			14,910			6,899			46	%
Investments		29,010			15,461			13,549			88	%	31,060			17,440			13,620			78	%
Federal funds sold		3,061			3,402			(341		)	-10	%	3,094			3,551			(457		)	-13	%
Federal Home Loan Bank stock		277			259			18			7	%	275			257			18			7	%
Total interest-earning assets		161,113			154,634			6,479			4	%	163,065			148,592			14,473			10	%
Total noninterest-earning assets		2,728			3,068			(340		)	-11	%	2,623			3,505			(882		)	-25	%
Total assets		$	163,841		$	157,702		$	6,139		4	%	$	165,688		$	152,097		$	13,591		9	%
Interest-bearing deposits		$	137,031		$	128,575		$	8,456		7	%	$	138,119		$	123,481		$	14,638		12	%
Other borrowed funds		2,078			231			1,847			800	%	1,870			256			1,614			630	%
Total interest-bearing liabilities		139,109			128,806			10,303			8	%	139,989			123,737			16,252			13	%
Noninterest-bearing deposits		11,553			10,431			1,122			11	%	12,209			9,683			2,526			26	%
Other noninterest-bearing liabilities		1,803			2,870			(1,067		)	-37	%	1,961			2,831			(870		)	-31	%
Stockholders’ equity		11,376			15,595			(4,219		)	-27	%	11,529			15,846			(4,317		)	-27	%
Total liabilities and stockholders’ equity		$	163,841		$	157,702		$	6,139		4	%	$	165,688		$	152,097		$	13,591		9	%
Total interest income		$	2,612		$	3,178		$	(566	)	-18	%	$	5,077		$	6,490		$	(1,413	)	-22	%
Total interest expense		1,120			1,860			(740		)	-40	%	2,355			3,667			(1,312		)	-36	%
Net interest income		$	1,492		$	1,318		$	174		13	%	$	2,722		$	2,823		$	(101	)	-4	%
Net interest margin		3.70		%	3.41		%						3.33		%	3.80		%

 

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 shareholders’ equity.  Pacifica’s earning assets accounted for 99% of its total assets as of June 30, 2002 and at year-end 2001. Loans are the highest-yielding component of Pacifica’s earning assets.  Loans averaged 65% of Pacifica’s total earning assets during the second quarter and the first six months of 2002, compared to 74% in the same periods of 2001.  Pacifica does not expect the yield spread to change significantly as a result of the Pacifica Mortgage operations since it currently originates

 

9

 

primarily single-family mortgage loans and the loans are brokered to other servicing agents with fees being paid to Pacifica Mortgage.  Revenue source for Pacifica Mortgage is presently fee income only.

 

Net interest income for the second quarter of 2002 increased by $174,000, or 13%, to $1.5 million, compared to $1.3 million in the second quarter of 2001.  The increase in net interest income reflects the effect of the repricing of time certificates of deposit to a lower average rate over time.  On a percentage basis, interest-earning assets increased less than interest-bearing liabilities during the second quarter of 2002.  Compared with the second quarter of 2001, average earning assets increased approximately $6.5 million, or 4%, to $161.1 million while average interest-bearing liabilities increased $10.3 million, or 8%, to $139.1 million for the second quarter of 2002.  However, due to the repricing of certificate of deposits to lower interest rates, total interest expense decreased by $740,000, or 40%, during the second quarter of 2002 as compared to the same period of 2001.

 

Net interest income for the first six months of 2002 decreased $101,000, or 4%, to $2.7 million, compared to $2.8 million in the same period of 2001.  The decrease in net interest income reflects the impact of rate changes on prime-based loans and the lag in repricing of time certificates of deposit. On a percentage basis, interest-earning assets increased less than interest-bearing liabilities during the first six months of 2002.  Compared with the same period of 2001, average earning assets increased approximately $14.5 million, or 10%, to $163.1million while average interest-bearing liabilities increased $16.3 million, or 13%, to $140 million for the first six months of 2002.  Given the current rate environment and the anticipated deployment of cash into loans and /or investments, we expect net interest margin and net interest income to increase slightly during the second half of 2002 as compared to the first six months of the year.

 

Net interest margin (net interest income divided by average earning assets) was 3.70% in the second quarter of 2002, compared with 3.41% for the same period of 2001. The increase in net interest margin reflects the positive effect of our efforts to lower the cost of deposits. However, the average yield on earning assets decreased to 6.48% during the second quarter of 2002 from 8.22% in the same period of 2001.  On the other hand, the average cost of interest-bearing liabilities for the second quarter of 2002 decreased to 3.22% from 5.78% in the same period of 2001.

 

For the first six months of 2002, net interest margin decreased slightly to 3.33% from 3.80% for the same period in 2001.  The average yield on interest-earning assets decreased to 6.22% in the first six months of 2002, compared with 8.74% in the same period of 2001.  Meanwhile, the average cost of interest-bearing liabilities decreased to 3.36% during the first six months of 2002 from 5.93% for the same period of 2001.

 

The decrease in average yield on earning assets is primarily due to the 475 basis point decline during 2001 in short-term interest rates. Our interest-earning assets have been repricing more quickly than our interest-bearing liabilities and the effects to lower the cost of deposits have lagged the effect of reduced loan and investment yields.  Over the course of last year and the first six months of 2002, Pacifica has lowered its cost of deposits, resulting in a positive impact on our net interest margin. At June 30, 2002, Pacifica had $92.0 million in time certificates of deposits.  Approximately $35.2 million of those time deposits are expected to reprice in the third quarter of this year.  Management believes this will continue to improve our net interest margin.

 

Average loans (net of deferred loan fees) were approximately $107 million in the second quarter of 2002, down $9.2 million from $116.2 million for the same period of 2001.  Yield on the loan portfolio (net of deferred loan fees) averaged 7.93% in the second quarter of 2002, compared to 9.25% in the same period of 2001.  For the six months ended June 30, 2002, average loans (net of deferred loan fees) were approximately $106.8 million, down $5.6 million from $112.4 million for the same period of 2001.  Yield on the loan portfolio (net of deferred loan fees) averaged 7.76% in the six months ended June 30, 2002, compared to 9.71% in the same period of 2001.

 

The decrease in loan yield is consistent with the drop in interest rates.  In addition, our deposits tend to reprice slower than our loans. During the second quarter of 2002, average interest-bearing deposits were $137 million,

 

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an increase of $8.5 million, or 7%, from $128.6 million during the same period of 2001.  The cost of interest-bearing deposits decreased to 3.19% in the second quarter of 2002, from 5.78% for the second quarter of 2001.  For the six months ended June 30, 2002, average interest-bearing deposits were $138.1 million, an increase of $14.6 million compared to the same period of 2001.  The cost of interest-bearing deposits averaged 3.34% in the six months ended June 30, 2002, compared to 5.93% in the same period of 2001.

 

Income on interest-earning deposits, Federal Home Loan Bank stock and federal funds sold totaled $111,000 and $220,300, respectively, for the second quarter and the six months ended June 30, 2002, an increase of $143,900 and $235,300 when compared to the same periods of 2001.  The average yields on investments were 5.19% and 4.55%, respectively, for the second quarter and the first six months of 2002, as compared to 6.15% and 6.59% for the same periods of 2001.

 

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. Currently, Pacifica’s assets tend to track the prime rate and reprice more quickly than its liabilities. Therefore, net interest margin usually increases in a rising interest rate environment.  In contrast, Pacifica may experience decreasing net interest income as a result of “rate squeeze” caused by this same principle in periods of falling interest rates.  Management continually monitors Pacifica’s mix of interest-earning assets and interest-bearing liabilities and may use other financial instruments to maintain an appropriate balance.

 

Noninterest Income

 

Noninterest income decreased by $1.2 million to $395 million in the second quarter of 2002, compared with $1.6 million for the same period in 2001.  For the first six months of 2002, noninterest income decreased by $1.5 million, or 68%, to $713,000 as compared to $2.2 million in the same period of 2001.  The decreases were due primarily to the $1.2 million and $1.7 million gains on sale of investment securities and derivatives during the second quarter and the first six months of 2001, respectively.  Loan commissions and other related income from Pacifica Mortgage totaled $232,000 and $433,000 for the second quarter and the first six months of 2002, respectively, an increase of 27% and 55%, respectively, as compared to the same periods of 2001.  International banking service fee income increased while certain other fee income decreased due to the decrease in the occurrence of transactions

 

Noninterest Expense

 

Noninterest expense increased $404,000, or 27%, for the second quarter of 2002 to $1.9 million, and $724,000, or 24%, to $3.7 million for the first six months of 2002, compared with the same periods in 2001.  The increases resulted primarily from the additional personnel costs and other expenses associated with Pacifica’s growth and the operations of Pacifica Mortgage and the Bank’s Seattle Office.

 

Salaries and employee benefits expense were approximately $1.2 million and $2.2 million for the second quarter and first six months of 2002, respectively,  up $355,000 or 44%, and $587,000, or 35%, from the same periods of 2001.  The increases were primarily results of the growth in the number of employees attributed to the expansion of Pacifica Mortgage and the opening of the Bank’s Seattle Office. Pacifica had 69 full-time equivalent employees at June 30, 2002, compared with 51 full-time equivalent employees at June 30, 2001.

 

Occupancy and equipment expense was $299,000 for the second quarter of 2002 and $590,000 for the first six months of 2002, up $83,000 (38%) and $157,000 (36%), respectively, from the same periods in 2001. The increase in occupancy and equipment expense was due primarily to the increase in building lease expense. Pacifica leased additional office space in Bellevue in March and August of 2001 and opened the Seattle Office in December 2001. With the new office in Seattle, we expect occupancy and equipment expense to increase in 2002 as compared to last year.

 

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Total other expenses were $444,000 in the second quarter of 2002 and $874,000 for the first six months of 2002, down $34,000 (7%) and $20,000 (2%), respectively, from the same periods in 2001. The decreases are due primarily to our continued efforts in controlling costs and the lack of organizational costs associated with the branch formation in 2002.

 

Analysis of Financial Condition

 

During the first six months of 2002, management continued to focus on credit quality and credit administration.  At June 30, 2002, Pacifica had assets of $162.1 million, a decrease of $9.3 million, or 5%, from $171.4 million at December 31, 2001. Shareholders’ equity was $11.9 million at June 30, 2002, up $87,000, or 1%, from $11.8 million at December 31, 2001.  Net loans increased $5.2 million, or 5%, to $107.6 million at June 30, 2002 from $102.3 million at December 31, 2001. The Company’s investment portfolio decreased $13 million, or 38%, to $21.3 million at June 30, 2002 from $34.3 million at December 31, 2001.  Deposits decreased 6% to $146.7 million at June 30, 2002 from $156 million at December 31, 2001.

 

Annualized return on average assets (ROA) was 1.17% and 0.27% for the second quarter and the first six months of 2002, respectively, compared to 1.06% and 0.33% for the same periods in 2001.  Annualized return on average stockholders’ equity (ROE) was 16.91% and 3.85% for the second quarter and the first six months of 2002, respectively, compared to 10.75% and 3.13% for the second quarter of 2001.  The improvements in ROA and ROE were due primarily to the $500,000 reduction of the excess funds in the allowance for loan loss reserve account. The Company’s average equity to average assets ratio was 6.94% and 9.89%, respectively, for the quarters ended June 30, 2002 and 2001.  Average equity to average assets ratio was 6.96% and 10.42%, respectively, for the first six months ended June 30, 2002 and 2001.

 

Investment Activities

 

Pacifica’s investment portfolio is an important source of liquidity and interest income.  The Company’s total investment portfolio includes Federal Home Loan Bank of Seattle (“FHLB”) stock, available-for-sale securities, and time certificates with other banks.  The Company had no held-to-maturity or trading securities.  All securities are classified as available-for-sale and are carried at fair value.  Securities are used by management as part of its asset/liability management strategy and may be sold in response to interest rate changes or significant prepayment risk.

 

The following table shows the amortized cost and estimated fair value of securities available-for-sale at the dates indicated:

 

		December 31, 2001
(Dollars in thousands)		Amortized Cost			Gross Unrealized						Estimated Fair Value
					Gains			Losses
Available-for-Sale Securities
U.S. Government agencies		$	25,597		$	76		$	—		$	25,673
Mortgage-backed securities		7,416			88			—			7,504
Total investment securities		$	33,013		$	164		$	—		$	33,177

 

		June 30, 2002
(Dollars in thousands)		Amortized Cost			Gross Unrealized						Estimated Fair Value
					Gains			Losses
Available-for-Sale Securities
U.S. Government agencies		$	13,405		$	—		$	(15	)	$	13,390
Mortgage-backed securities		6,808			—			(26		)	6,782
Total investment securities		$	20,213		$	—		$	(41	)	$	20,172

 

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In addition, during the first quarter of 2002, Pacifica Bancorp, Inc., the bank holding company, down streamed $920,000 to the Bank as additional investments in the Bank.

 

Lending Activities

 

Loan Portfolio Composition. Pacifica originates a wide variety of loans to small and medium sized businesses and individuals.  The following table sets forth the loan portfolio composition by type of loan at the dates indicated:

 

		June 30, 2002					December 31, 2001
(Dollars in thousands)		Amount			% of Total		Amount			% of Total
Commercial and industrial loans		$	45,132		40	%	$	41,673		39	%
Real estate - construction		21,458			19	%	26,071			25	%
Real estate - mortgage		43,753			39	%	35,864			33	%
Consumer and other		1,630			2	%	2,665			3	%
		111,973			100	%	106,273			100	%
Less deferred loan fees		(426		)	0	%	(395		)	0	%
Total loans		$	111,547		100	%	$	105,878		100	%

 

At June 30, 2002, total loans increased by $5.7 million, or 5%, to $111.6 million from $105.9 million at year-end 2001.  Increases in commercial loans and real estate mortgage loans contributed to the majority of the increase.  Commercial loans increased $3.5 million, or 8%; real estate mortgage loans increased $7.9 million, or 22%, mainly as a result of new originations while real estate construction loans decreased $4.6 million, or 18%, and consumer and other loans decreased $1 million, or 39%, due to loan payoffs.  The growth in loans was funded by cash and cash equivalents and investments.

 

Pacifica’s commercial loan portfolio includes loans to businesses in the manufacturing, wholesale, retail, service, agricultural, and construction industries, primarily located in western Washington.  As of June 30, 2002, there was no significant concentration of loans to any particular group of customers engaged in similar activities and having similar economic characteristics.  However, due to the limited scope of Pacifica’s primary market area, a substantial geographic concentration of credit risk exists and, as a result, localized economic downturns can be expected to have a more pronounced effect on Pacifica than they might with a similar but more geographically diversified business.

 

Analysis of Provision and Allowance for Loan Losses

 

The allowance for loan losses is established to absorb potential loan losses inherent in a loan portfolio.  The allowance is increased by a provision for loan losses, and reduced by loans charged off (net of recoveries).  The provision for loan losses is charged directly against earnings in the corresponding period.  On the balance sheet, the loan loss reserve is applied against gross loans to arrive at net loans outstanding.  If a loan is charged off, the charge-off reduces net loans on the balance sheet only to the extent the charge-off exceeds the established reserve; from the income statement perspective, the charge-off in excess of the reserve ordinarily is charged against operating revenues.

 

Management reviews and evaluates the appropriate level of the allowance for loan losses and determines the provision on a monthly basis.  The evaluation by management includes consideration of changes in the nature and volume of the portfolio as well as commitments and standby letters of credit, overall portfolio quality, past loan loss experience, peer bank experience, loan concentrations, specific problem loans, internal and external credit examination results, and the current economic conditions that may affect the borrowers’ ability to pay.

 

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Management monitors delinquencies closely.  Loan loss reserve calculations, the status of classified loans and the delinquencies are reported to the Board of Directors and the Bank’s loan committee monthly.  In addition, regulatory agencies, such as the FDIC, the Department and the SEC, as an integral part of their examination process, periodically review the estimated losses on loans.  Such agencies may require Pacifica to adjust the allowance for loan losses based on their judgment about information available to them at the time of their examination.

 

The relatively young age of Pacifica’s loan portfolio makes it difficult to determine the degree of loss that ultimately may reside in its loan portfolio.  Management has made provisions for loan losses aimed at maintaining a reasonable reserve against outstanding loans.  Management anticipates additional provisions for loan losses will be made in the future as the loan portfolio matures and the expected growth continues.  Changes in economic conditions may also warrant increasing provisions for loan losses.  Pacifica periodically utilizes professional external loan reviews performed by independent consultants to help evaluate the loan portfolio.

 

While management believes that it uses the best information available to determine the allowance for loan losses, unforeseen market conditions could result in adjustments to the allowance for loan losses, and net income could be significantly affected, if circumstances differ substantially from the assumptions used in making the final determination.

 

Pacifica’s loan loss analysis procedure emphasizes early detection of loan losses.  The Company significantly increased its allowance for loan losses through additional provisions during 2001, and no additions to the allowance for loan losses were made during the second quarter or first six months of 2002.  The Company has significantly reduced the amount of its classified assets during the first six months of 2002 from December 31, 2001.  Based on an analysis of its allowance for loan losses, management believes there is excess reserve in the allowance for loan losses, and therefore transferred $500,000 out of the allowance for loan losses during the second quarter of 2002.  At June 30, 2002, the allowance for loan losses was $4.0 million, or 3.58% of total loans, compared to $3.5 million, or 3.33% of total loans, at December 31, 2001. The $466,000 increase from year-end 2001 represents recoveries from charged off credits as discussed below and the transfer of excess funds out of the allowance account.  Management believes the current balance of the allowance for loan losses is adequate to provide against current potential loss.

 

During the first six months of 2002, the Company collected $966,000 from loan loss recoveries, of which, $887,000 represents a recovery from a bond claim. The Company filed a bond claim of approximately $2.5 million in October 2001 with its insurance company in connection with a previously charged-off credit.  During the second quarter of 2002, the Company reached a partial settlement agreement with the insurance company and received a payment of  $887,000.  There is no assurance that the Company will be able to collect any additional payments on this claim from the insurance company.

 

The following table sets forth information regarding changes in Pacifica’s allowance for loan losses:

 

		Three Months Ended June 30,						Six Months Ended June 30,
(Dollars in thousands)		2002			2001			2002			2000
Balance at beginning of period		$	3,586		$	2,150		$	3,530		$	1,306
Charge-offs		—			(1,100		)	—			(1,100		)
Recoveries		910			—			966			—
Provision for loan losses		(500		)	950			(500		)	1,794
Balance at end of period		$	3,996		$	2,000		$	3,996		$	2,000
Ratio of net charge-offs to average loans outstanding during the period		0.00		%	0.95		%	0.00		%	0.98		%

 

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Nonperforming Assets

 

Nonperforming loans include nonaccrual loans, restructured loans, and loans 90 days or more past due.  Pacifica’s policy generally is to place loans on a nonaccrual basis when, in management’s judgment, the collateral value and the financial condition of the borrower do not justify accruing interest as an income item. Interest previously recorded but not deemed collectible is reversed and charged against current income. Interest income on these loans is then recognized when collected. Restructured loans are loans for which the contractual interest rate has been reduced or other concessions are granted to the borrower because of deterioration in the financial condition of the borrower resulting in the borrower’s inability to meet the original contractual terms of the loans.

 

Nonperforming loans were $1.86 million, or 1.67% of total loans at June 30, 2002, compared to $478,000, or 0.45% of total loans as of December 31, 2001.  A $480,000 nonaccrual loan was rebooked during the second quarter and the successor loan is a classified loan but not a nonaccrual loan.  The nonperforming loans at June 30, 2002 were comprised of four loans ranging from $10,200 to $1.15 million. These loans were all commercial credits, representing different industries.  After quarter end, a $429,500 nonperforming loan was charged off in July 2002. We have been actively working to achieve a workout and collection plan on that loan.  Also, a commercial loan with a balance of $10,200 was paid off in July.

 

Potential problem loans are loans that are performing and are not nonaccrual, past due 90 days or more, or restructured, but about which there are significant doubts about the borrower’s ability to comply with the present repayment terms in the future and which later may be included in nonaccrual, past due, or restructured loans. At June 30, 2002, we had $5.5 million in potential problem loans, including $1.9 million in impaired loans, down 30% and 47%, respectively, from December 31, 2001, at which time we had $7.8 million in potential problem loans, including $3.6 million in impaired loans.  Of the potential problem loans at year-end 2001, $1.2 million was collected and $1.4 million was moved from impaired loans to nonaccrual status during the first six months of 2002.  The potential problem loans at June 30, 2002 were comprised of four credit relationships with outstanding balances ranging from $312,000 to $1.9 million.  One of the potential problem loans in the amount of $49,900 was subsequently charged off in July 2002 and another credit relationship in the amount of $1.8 million was classified as nonaccrual in August 2002.  A loan in the amount of $868,000 was downgraded to a potential problem loan in August 2002. Management anticipates the current level of potential problem loans to improve in the following quarters as we continue our efforts to achieve the workout plans with our customers.

 

Liquidity and Sources of Funds

 

Asset/Liability and Liquidity Management

 

The primary function of asset/liability management is to ensure adequate liquidity and maintain an appropriate balance between interest-sensitive earning assets and liabilities.  Liquidity management focuses on Pacifica’s ability to meet the financial demands of depositors, creditors and borrowers.  Pacifica actively manages the levels, types and maturities of earning assets in relation to the funding sources available to ensure that adequate funding will be available at all times. In addition, the Supervisory Directive temporarily limits the Bank’s ability to pay dividends other than those necessary to service existing holding company debt. Management believes that Pacifica’s current liquidity is adequate to meet its operating requirements, however it is considering various ways to raise capital, including the issuance of preferred stock and trust preferred securities, to comply with the Tier 1 capital requirements of the Supervisory Directive.

 

Sources and Uses of Funds

 

The Company’s sources of funds are customer deposits, loan repayments, current earnings, cash and demand balances due from other banks, federal funds sold, short-term investments, investment securities available for

 

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sale, and borrowed funds from the Federal Home Loan Bank (“FHLB”) and correspondent banks.  These funds are used to make loans, to acquire investment securities and other assets, and to fund continuing operations.

 

Cash. Cash and cash equivalents at June 30, 2002 totaled $28.8 million, up 19% from $24.3 million at June 30, 2001.

 

Cash from (used by) Operating Activities.  Net cash used by operating activities totaled $303,000 in the first six months of 2002, down from net cash provided by operating activities of $960,000 in the same period of 2001.  This decrease was caused primarily by the $500,000 decrease in the allowance for loan losses and the $480,000 reduction in interest payable.

 

Cash from (used by) Investing Activities.  Net cash provided by investing activities was $6.5 million during the first six months of 2002, as compared to net cash used by investing activities of $9.5 million in the same period of 2001.  Funding for new loans and securities for the first six months of 2002 primarily came from the sales, pay downs and maturities of securities.  This reflects management’s effort in reducing excess interest-bearing deposits.  In the first quarter of 2001, investing activities were centered in the loan growth of $11.4 million.

 

Cash from (used by) Financing Activities.  In the first six months of 2002, net cash used by financial activities totaled $8.7 million, down from net cash provided by financing activities of $20.4 million in the same period of 2001, as the result of a decrease in deposits of $9.3 million and an increase in borrowings of $515,000.  In the same period of 2001, funding from financing activities came mainly from interest-bearing deposit growth of $19.4 million.

 

Deposits

 

Pacifica seeks to attract deposits in its primary market area by pricing its products competitively and delivering quality service.  Pacifica offers various types of deposit accounts, including checking, savings, money market accounts and a variety of certificate of deposit accounts.

 

Total deposits decreased by 6% to $146.7 million at June 30, 2002, compared to $156 million at December 31, 2001.  Noninterest-bearing deposits decreased 24% to $10 million at June 30, 2002, from $13.2 million at December 31, 2001. During the same period, interest-bearing deposits also decreased $6.1 million, or 4%, to $136.7 million, with the reduction being attributable to Pacifica’s efforts to monitor our asset size and increase our loan-to-deposit ratio by reducing our time deposits.  We expect to grow our deposits by approximately $15 million before year-end 2002 to fund our intended loan growth.

 

Time deposits accounted for $92 million, or 67%, of the total interest-bearing deposits at June 30, 2002, down from $103.7 million, or 73% of the total interest-bearing deposits at December 31, 2001.  In comparison, money market deposits increased to $36.6 million, or 27% of the total interest-bearing deposits at June 30, 2002, from $33.3 million, or 23% of the total interest-bearing deposits at December 31, 2001, and NOW accounts increased to $7.6 million, or 6% of the interest-bearing deposits at June 30, 2002, from $5.6 million, or 4% of the interest-bearing deposits at December 31, 2001.

 

Borrowings

 

At June 30, 2002 and December 31, 2001, Pacifica had demand notes issued to the U.S. Treasury in the amount of zero and $247,000, respectively, down from $459,700 and $376,000 at June 30, 2001 and December 31, 2000, respectively, representing the Treasury Tax and Loan note balance.

 

In addition, Pacifica obtained a $3 million one-year revolving line of credit with an independent third party bank in September 2001.  The line of credit is collateralized by the Company’s Pacifica Bank stock and

 

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subject to certain restrictive covenants including, among others, requirements with regards to capital ratios, loan loss reserve ratios and lender’s prior approval on certain transactions. Interest on this line is at the bank’s prime rate plus 0.75% and is paid quarterly.  Borrowings under this line of credit totaled $1.8 million and $1.1 million at June 30, 2002 and December 31, 2001, respectively.

 

Pacifica Mortgage obtained a $5 million revolving line of credit with a federally chartered savings bank in February 2002.  The line of credit is used as a mortgage warehousing line to warehouse certain mortgage loans pending the sale of such loans, and is collateralized by such mortgage loans and related collateral.  The line of credit is guaranteed by the Company and is subject to certain restrictive covenants including, among others, requirements with regards to certain financial ratios and guarantor’s ownership interest in Pacifica Mortgage. Interest on this line is at the bank’s prime rate with a floor of 6%.  Pacifica Mortgage did not have any outstanding balance on this line as of June 30, 2002.

 

Under the accounting principals generally accepted in the United States of America and the reporting guidelines of the Federal Reserve Board, the Company’s limited life Series A-2 Preferred Stock is accounted for as subordinated debt while the perpetual Series A-1 Preferred Stock is accounted for as equity capital. The Company closed the sale of $1.4 million from its Series A-2 Five-Year Cumulative Preferred Stock in July 2002.

 

Capital

 

Pacifica’s shareholders’ equity at June 30, 2002 was $11.9 million, up 1% from $11.8 million at December 31, 2001.  Shareholders’ equity was 7% of total assets at June 30, 2002 and December 31, 2001.

 

The primary reason for the increase in the Company’s shareholders’ equity since December 31, 2001 was the net income for the first six months.  The accumulated deficit decreased from $4.4 million at year-end 2001 to $4.1 million as of June 30, 2002 due primarily to a net income of $222,000 for the first six months of 2002.  Accumulated other comprehensive income (loss) was ($27,000) as of June 30, 2002 and $108,000 at December 31, 2001.  The ($135,000) change represents an increase in unrealized loss on available-for-sale securities, net of tax effect.

 

Capital Ratios

 

Pacifica and the Bank are subject to minimum capital requirements under banking regulations for bank holding companies and banks.  Under the risk-based capital guidelines, risk percentages are assigned to various categories of assets and off-balance sheet items to calculate a risk-adjusted capital ratio.  Tier I capital generally consists of common shareholders’ equity (which does not include unrealized gains and losses on securities), less goodwill and certain identifiable intangible assets, while Tier II capital also includes the allowance for loan losses and subordinated debt, both subject to certain limitations.  The leverage capital guidelines require banks to maintain a minimum ratio of Tier I capital to average total adjusted assets (“leverage ratio”) of 4%.

 

The FDIC may establish higher minimum requirements if, for example, a bank has previously received special attention or has a high susceptibility to interest rate risk.  The Supervisory Directive discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Overview” requires Pacifica Bank’s Tier 1 Leverage Capital ratio to be maintained at a level that would be typically required for a de novo bank (a newly chartered bank with less than five years of operations). Banks with capital ratios below the required minimum are subject to certain administrative actions, including the termination of deposit insurance upon notice and hearing or a temporary suspension of insurance without a hearing in the event the institution has no tangible capital.  For the second quarter of 2002, the Bank’s Tier 1 Leverage Capital ratio exceeded the level required for a de novo bank.

 

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The FDIC has established qualifications necessary to be classified as a well-capitalized bank, primarily for assignment of FDIC insurance premium rates. The following table sets forth the current regulatory requirements for capital ratios that are applicable to Pacifica, compared with Pacifica’s capital ratios at dates indicated. The table illustrates that Pacifica’s capital ratios exceeded the regulatory capital requirements and qualified as “well-capitalized” at June 30, 2002 and December 31, 2001.

 

						June 30, 2002				December 31, 2001
Capital Ratios		Regulatory Minimum		To Be Well Capitalized		Pacifica’s Actual Ratio		The Bank’s Actual Ratio		Pacifica’s Actual Ratio		The Bank’s Actual Ratio
Tier I Capital to Risk-Weighted Assets Ratio		4.00	%	6.00	%	9.72	%	11.02	%	9.82	%	10.18	%
Total Capital to Risk-Weighted Assets Ratio		8.00	%	10.00	%	11.00	%	12.30	%	11.09	%	11.45	%
Leverage ratio		4.00	%	5.00	%	7.27	%	8.24	%	6.82	%	7.06	%

 

Market for Common Equity

 

Pacifica’s stock is restricted and is not listed on any exchange or traded on the over-the-counter market.  No 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 sales prices for Pacifica’s stock between individual investors, for transactions known to Pacifica, during the past six quarters.

 

		2002						2001
		High			Low			High			Low
First quarter		$	6.00		$	5.50		$	10.00		$	9.25
Second quarter		8.00			5.00			10.00			10.50
Third quarter								11.05			9.00
Fourth quarter								11.00			8.00

 

Capital Expenditures and Commitments.

 

The Company had no material capital expenditures or commitments at June 30, 2002.

 

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PACIFICA BANCORP, INC.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Market risk is the exposure to loss resulting from changes in interest rates, foreign currency exchange rates, commodity prices and equity prices. The primary market risk to which the Company is exposed is interest rate risk.  Interest rate risk occurs primarily when assets and liabilities reprice at different times and when spreads change between asset and liability rates as interest rates change.

 

Pacifica maintains an asset/liability management policy that provides guidelines for controlling exposure to interest rate risk.  The guidelines direct management to assess the impact of changes in interest rates upon both earnings and capital.  The guidelines further provide that in the event of an increase in interest rate risk beyond preestablished limits, management will consider steps to reduce interest rate risk to acceptable levels.

 

The analysis of an institution’s interest rate gap (the difference between the repricing of interest-earning assets and interest-bearing liabilities during a given period of time) is one standard tool for the measurement of the exposure to interest rate risk.  Pacifica believes assumptions for the model are inherently subjective and that because interest rate gap analysis does not address all factors that can affect earnings performance, it should be used in conjunction with other methods of evaluating interest rate risk.

 

At June 30, 2002, based on the measures used to monitor and manage interest rate risk, there has not been a material change in the Company’s interest rate risk since December 31, 2001. For additional information, refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations” referenced in the Company’s annual report on Form 10-KSB for the year ended December 31, 2001.

 

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PACIFICA BANCORP, INC.

PART II – OTHER INFORMATION

 

Item 4.    Submission of Matters to a Vote of Security Holders

 

On May 28th, 2002, the Annual Shareholders’ Meeting was held in Bellevue, Washington. The following are the results of the matters voted upon:

 

(a)          Election of  “Class 1 Directors” to serve a three year term on the Company’s Board

 

Class 1 Directors – term expires with 2002 annual meeting:

Mark P. Levy

George J. Pool

Mark W. Weber

 

Votes for -		2,105,911
Votes against -		2,400
Votes abstaining -		1,000

 

(b)         Approval of an increase of 200,000 in the number of authorized shares under the Company’s employee stock option plan.

 

Votes for -		2,012,031
Votes against -		65,200
Votes abstaining -		32,080

 

Item 6.    Exhibits and Reports on Form 8-K

 

(a)          Exhibits

 

11     - Computation of per share earnings

 

99.1  - Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

99.2  - Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

(b)         Reports on Form 8-K

 

Pacifica did not file any reports on Form 8-K during the first six months of 2002.

 

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PACIFICA BANCORP, INC.

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

			PACIFICA BANCORP, INC.
Date:	August 12, 2002	By	/s/  Jeffery C. Low
			Jeffery C. Low
			Chairman, President and Chief Executive Officer
			(Principal Executive Officer)
Date:	August 12, 2002	By	/s/  John D. Huddleston
			John D. Huddleston
			Chief Financial Officer and Chief Operating Officer
			(Principal Financial and Accounting Officer)

 

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