Back to GetFilings.com

Table of Contents

U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

(Mark One)

For the fiscal year ended December 31, 2003

For the transition period from              to             

Commission File Number 000-32385

Pacifica Bancorp, Inc.

(Exact name of registrant as specified in its charter)

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

(Address of principal executive offices) (Zip Code)

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

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

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

Common Stock

(Title of class)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

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

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

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

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

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

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

Table of Contents

TABLE OF CONTENTS

SELECTED FINANCIAL DATA

MESSAGE TO OUR SHAREHOLDERS

COMPANY PROFILE

FORM 10-K

Table of Contents

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

PACIFICA BANCORP, INC.

FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA

Table of Contents

PART I

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

ITEM 1. BUSINESS

General

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

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

1

Table of Contents

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

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

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

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

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

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

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

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

2

Table of Contents

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

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

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

See inside cover of the annual report.

Market Area

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

Competition

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

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

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

3

Table of Contents

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

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

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

Employees

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

Regulation and Supervision

General

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

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

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

4

Table of Contents

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

Supervisory Directive

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

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

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

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

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

Recent Reform Legislation

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

Affiliate Transactions

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

Branching and Interstate Acquisitions

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

5

Table of Contents

Banking Activities

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

Capital Adequacy Requirements

The FDIC has adopted regulations establishing minimum requirements for the capital adequacy of insured banks which address both risk-based capital and leverage capital. See “Management’s Discussion and Analysis of Financial Condition and Result